Tenancy in common (TIC) is a real estate transaction in which there is more than one owner of a specific property. It is not an uncommon situation, but it can have both good and bad factors related to it. Understanding tenancy in common in a commercial real estate transaction is a critical step if this type of structure will be used.
What Is Tenancy in Common?
TIC is a type of ownership structure. In this transaction, more than one party will own the same property. There are some situations where this can be good, for example, because it can make it simpler for borrowers to get the financing they need for a property. However, TIC can also come with several legal and sometimes more complex complications when the owners do not have good practices.
There are various situations when this could occur. For example, it can be set up through paperwork by two or more parties as co-owners during the purchasing process of commercial real estate. It could also be a default situation under the state’s property laws. Sometimes it is necessary because one person or organization can’t hold the property alone.
How Does TIC Work in Commercial Real Estate?
This legal arrangement occurs when two parties (or more) share commercial real estate ownership rights. In this arrangement, the owners may share privileges and interests in all aspects of the property. While they share those interests, they can have different levels of rights or percentages of their overall interest in the property.
This type of agreement is flexible in that it can be created anytime. It is possible to add a new tenant in common at any time during the ownership, even after other parties have entered the agreement.
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Tenancy in Common vs. Joint Tenancy
What is the difference between joint tenancy and tenancy in ordinary?
It is not uncommon for a property that more than one individual owns to be a joint tenancy rather than a common one. When it is a joint, the structure must conform to a specific set of rules or standards. These are often called TTIP. These standards require that each joint tenant must start their ownership of the property together.
In addition, it must be documented on the property’s deed – the same deed. In addition, each joint tenant has to have the same type of ownership share in commercial real estate. That includes providing equal possession rights to the property. In many situations, a joint tenancy becomes a TIC when one tenant decides to sell their portion of the property’s ownership to another joint tenant or party.
This is very different from what can be expected in a TIC situation. For example, it is not uncommon for each tenant to have a different percentage of ownership shares in the property. In some cases, one party may have a 30 percent stake of ownership and the other 70 percent, or any further configuration. Unlike joint tenancy, all parties must have the same privilege level.
Another difference is that the ownership of the property does not have to occur at the same time as it does in joint tenancy. Instead, adding a new tenant at any time is possible, which is not uncommon.
Another significant difference is that when a commercial real estate investor dies in a TIC, the property’s share does not automatically go to the other property owners. That’s what occurs in a traditional joint tenancy. In a TIC, though, the property owner can pass to the named heir of the tenant.
What Are the Benefits and Drawbacks of TIC?
When considering tenancy in common in a commercial real estate transaction, it is critical to know the pros and cons of this scenario. Considering living in its ordinary meaning, consider the following.
Advantages of Tenancy in Common
There are numerous benefits to this arrangement.
For example, it allows for the property to be purchased. In other words, all aspects of the purchase are more accessible, allowing all parties to participate. This includes dividing up the down payment, maintenance, upgrades, and payments.
In addition to this, in comparison to a joint tenancy, a TIC can allow the tenant structure to change over time, meaning that more people can be added to it. Also, different degrees of ownership are permitted, providing more flexibility than a joint tenancy.
Disadvantages of Tenancy in Common
There are some disadvantages of tenancy in common also to consider.
For example, when a mortgage is obtained to purchase commercial real estate, all borrowers agree to the terms and conditions of the loan together. When this happens, all parties hold equal liability to the property.
For example, if one of the tenants in common does not make payments as agreed, the other parties could be held responsible or have assets seized. There are also no automatic survivorship rights in a TIC, which could be concerning for some property owners. Other factors to remember include that any tenant can cause the forced sale of the real estate property at any time.
Tenancy in Common Tax Implications
With the TIC structure, there are some factors to consider when it comes to taxation. Most of the time, the TIC receives a single tax bill. This bill is then divided based on the amount of commercial real estate each party owns. This requirement is often outlined in the agreement that all parties agree to.
There could be some local and state laws that play a role in this, but the tenants make their own decision about how this payment is structured.
It is also important to note that each TIC will have a liability in the tax bill. For example, if one of the parties defaults on their payment because they filed for bankruptcy, the other tenants must pay that bill.
How to End a Tenancy in Common Agreement?
In some situations, it may be necessary to dissolve the tenancy in common. One member of the TIC can buy out the other members. This would lead to the dissolving of the TIC. It is done in a joint agreement.
Sometimes the parties cannot agree on the dissolving of the property. This may lead to a breaking up of the ownership in a court order and legal proceeding.
Wrapping Things Up
In many situations, the use of TIC is sensible and beneficial, creating an opportunity for property owners to achieve the purchase and ownership of commercial real estate property in a meaningful manner. When considering this type of structure, investors must consider the drawbacks, including the shared liability in tax and mortgage liens and the process for dissolving them. Without a doubt, TIC is not uncommon and is readily used in various scenarios as a viable solution for ownership.
Randolph is a Multifamily Investment Sales Broker with eXp Commercial servicing Multifamily Buyers and Sellers in the Greater Chicago Area.