Tenancy in Common (TIC) Structures: What are they and are they a good fit?

Tenancy in common (TIC) is an arrangement where two or more investors share ownership rights in a property or parcel of land. Different investors can own different percentages of the property and have the right to leave their share of the property to any beneficiary as a portion of their estate. Contract terms for tenants in common are detailed in the TIC agreement, which discusses who’s in charge of day-to-day operations and does not have to involve all tenants. Yet, to be able to sell or refinance the property, all tenants in common will have to agree.

One issue is that by law, tenancy in common has the right to file for partition. If all but one tenant wanted to hold the asset, the sole tenant opposed could go to court and sue under the right of partition. The judge could either force the property to get equally divided up or force the liquidation of the asset and all tenants would get paid out. You must have everyone working unanimously and having a tenancy in common generally orbits around control of the asset.

Lenders are wary of doing TIC deals particularly with people who don't know each other as they may not agree on an investment strategy and the probability that one tenant stonewalls a major decision is more likely to occur. Lenders will act on a TIC deal when the number of parties is limited or are family members as the assumption will be that they will likely be on the same page when making major decisions.

Another issue with TIC is that if there happens to be one tenant in common that files for bankruptcy, then the whole deal goes into bankruptcy no matter if the rest of the tenants are in good standing. Percentage of ownership doesn't matter, if one tenant owns 90% of the property and the tenant who went bankrupt owns 10%, the property will still fall into bankruptcy.

Why do a Tenancy in Common deal?

The reason you go through the headaches of tenancy in common is that you can 1031 exchange in and out of a deal independently. Michael Tanner from our LA office shared insight with us about TIC's and stated, "I have a borrower that does a lot of his investing as TICs with two of his partners for the 1031 exchange aspect. They want to be able to walk away from the deal separate from each other, even though they keep reinvesting together all the time. A lot of our lenders are okay if it's a limited number of tenants because they want to have a party in charge to steer the ship."

TIC structures were a really big vehicle used prior to the recession but are now becoming popular in major cities like Los Angeles where the cost of homeownership is rising. Click on the link below to read a recent article from the LA Times about tenancy in common: