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TIC Explained - What is "tenants in common" ownership?

An investor who holds title to property as a “tenant in common” (TIC) with other tenants, holds his title as an undivided interest that he has the right to transfer by deed or will. The TIC interest carries with it all the rights an owner has as if he owned the property by himself.  These rights include the right to sell, the right to transfer by will or trust, the right to collect rents, and so forth.  He also has the normal obligations of an owner of real property—pay expenses including taxes and so forth. 

TIC Agreements

There are a number of agreements that the Sponsor will draft to facilitate the operation of the property.  Each agreement is available for the investor to read before he must commit to the deal.  Connect Investments is familiar with these documents and is available to assist the investor in making his investment decision.

1.  Management Agreement

In a TIC the Sponsor makes arrangements with a management company for the handling of and the accounting for the income and expenses of each property.  The Sponsor creates the Management Agreement for all parties to sign before the closing.  Since many Sponsors take a position as a tenant in common along with the investors, the Sponsor will remain in the deal thus keeping an eye on the management company.  Generally, the TIC owners have the right to terminate the management company.

2.  Tenant in Common Agreement

The big difference between sole ownership and a TIC is that in a TIC the rights of the other tenants must be taken into consideration.  Therefore an agreement is drawn by the Sponsor and signed by the tenants.  It describes what the tenants’ rights are in relationship to each other.  Part of the Sponsor’s duty in bringing all the tenants together is to formulate a document that protects the rights of all tenants as well as insuring the uninterrupted operation of the property.  No one wants a renegade tenant to disrupt the operations of the building or have the power to affect the interest of any other tenant.  For example, a tenant who is going through a difficult divorce, or whose heirs are fighting over his interest after his death, may cause a problem absent an agreement that provides for ways to handle such matters.

The right to sell one’s interest is usually covered in detail.  Generally, the right to sell is conditioned upon an owner being required to offer the interest to the other tenants and/or the Sponsor before he sells to an outside party.  Methods of handling the issue of value are also covered.

These documents can become quite involved because they usually try to anticipate every potential problem that may occur. We at Connect Investments are familiar with the various ways the attorneys for the Sponsors have handled these and other problems in the documents. We can assist the investor so that he can make the appropriate decision for his investment portfolio.

3.  LLC Agreement

Most TICs require each investor to hold title to his interest in a Limited Liability Company (LLC).  There are a number of reasons for this.  Perhaps most notably to insure uninterrupted operation of the property in the event a particular tenant dies or causes a problem.  The Sponsor will generally set up the LLC for the investor and see to it that the LLC complies with state law in its formation.

4.      Other Agreements

There will be a few other documents that generally must be read and signed.  All owners sign the Promissory Note to the lender.  However, in almost all cases the note is non-recourse meaning the lender does not have the ability to seek recourse against the personal assets of the owner in the event the note goes into default.

There may be a Rights Agreement between the Sponsor and the investor describing their relationship and disclosures they make to each other.

There may be a Broker Agreement describing the rights of a particular brokerage company to handle the resale of the property in the event the owners decide to sell.

TIC vs. Joint Tenancy

When a document like a deed creates a “joint tenancy,” the interest a joint tenant has will pass directly to the surviving joint tenant upon his death. Most common among joint tenancies are deeds to a husband and wife, when they buy their home for instance. There are very specific rules one must adhere to in order to create a true joint tenancy.  However, the interest of a tenant in common does not pass to the other tenants upon his death.  A TIC interest passes according to the tenant’s will or trust.

Who is the TIC Buyer?

The TIC buyer is anyone with either real property coming out of a 1031 exchange or available cash who wants:

  • Steady monthly cash flow at rates generally higher than CDs, Bonds or T-Bills.
  • An investment that will appreciate in equity with the real estate market.
  • No management responsibility over the investment.
  • The tax benefits of depreciation.
  • To show all his friends that he made a wise investment decision in a large piece of commercial property just like the big guys do.

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