An Overview of Tenancy in Common
Tenancy in Common (TIC) is a form of property ownership where multiple parties hold individual interests in the same commercial real estate asset. While it’s a fairly common structure, it carries both advantages and potential drawbacks. Understanding the fundamentals of TIC is essential for any investor considering this shared ownership model.
What Is Tenancy in Common?
TIC represents a type of legal ownership in which two or more individuals or entities hold separate, undivided interests in a property. These interests may vary in size and are often outlined during the purchase process. For some investors, TIC provides easier access to financing and investment opportunities. However, if not managed well, this structure can lead to legal complications and operational inefficiencies.
This arrangement may arise through a formal agreement during the acquisition of the property or occur by default under specific state property laws. In many instances, TIC is used when a single party is unable or unwilling to take sole ownership of a commercial asset.
How Tenancy in Common Works
In a TIC arrangement, all co-owners share rights to the property, but their ownership shares can differ. Each party maintains the ability to sell or transfer their interest independently. TIC agreements can be formed at any time and can include new owners even after the initial purchase.
Tenancy in Common vs. Joint Tenancy
While both TIC and joint tenancy involve shared ownership, they differ in several key ways:
- Timing & Documentation: Joint tenancy requires that all co-owners acquire ownership simultaneously and have their interests documented on the same deed. TIC allows ownership at different times and on separate agreements.
- Ownership Shares: In joint tenancy, each party must hold equal ownership. In TIC, ownership percentages can vary.
- Survivorship Rights: In joint tenancy, ownership automatically transfers to the surviving owners upon a tenant’s death. In TIC, the decedent’s share passes to their heirs.
Pros and Cons of Tenancy in Common
Advantages:
- Accessibility: Makes it easier for multiple parties to pool resources for a property purchase.
- Flexibility: Allows varying ownership percentages and the ability to add new co-owners over time.
- Control: Each owner can sell or transfer their share independently.
Disadvantages:
- Shared Liability: All owners may be equally liable for debt or legal issues related to the property, even if they don’t default themselves.
- No Survivorship: Property interest doesn’t automatically transfer to co-owners upon death.
- Potential for Disputes: Disagreements may lead to forced sales or legal challenges.
Tax Considerations
Typically, the property receives a single tax bill, divided among owners according to their ownership stakes. The TIC agreement often specifies how taxes are allocated. If one owner cannot pay their portion—such as in the event of bankruptcy—the other co-owners may be responsible for covering the balance.
Ending a Tenancy in Common
A TIC can be dissolved through mutual agreement, with one or more co-owners buying out the others. In cases where consensus cannot be reached, the matter may proceed to court, resulting in a forced sale or legal division of ownership.
Conclusion
Tenancy in Common is a widely used and flexible ownership model in commercial real estate. While it offers several benefits, including accessibility and adaptability, it also presents legal and financial risks. Understanding these dynamics is critical for anyone looking to enter a TIC agreement as a strategic means of co-owning commercial property.