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 is one that 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 type of transaction, more than one party will own the same property. There are some situations in which 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 a number of legal and sometimes more complex complications when the owners do not have good practices in place.
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 property laws of the state. Sometimes it is a necessary process because it is not possible for one person or organization to 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 type of arrangement, the owners may share privileges as well as 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 at any time. It is possible to add a new tenant in common at any time during the ownership as well, even after other parties have entered the agreement.
Tenancy in Common vs Joint Tenancy
What is the difference between joint tenancy and tenancy in common?
It is not uncommon for a property that is owned by more than one individual to be a joint tenancy rather than a tenancy in common. When it is a joint, though, 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 to this, it must be documented on the property’s deed – the same deed. In addition to this, 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 makes the decision to sell their portion of the property’s ownership to another joint tenant or another party.
This is very different from what can be expected in a TIC situation. For example, it is not uncommon for each of the tenants to have a different percentage of ownership shares in the property. In some situations, one party may have a 30 percent stake of ownership and the other 70 percent, or any other configuration. That’s unlike joint tenancy, in which all parties must have the same level of ownership.
Another difference is that the ownership of the property does not have to occur at the same time as it does in joint tenancy. Rather, it is possible to add a new tenant at any time, and this is not uncommon.
Another significant difference is that in a TIC when one of the commercial real estate investors dies, the share of the property does not automatically go to the other owners of the property. That’s what occurs in a traditional joint tenancy. In a TIC, though, the property ownership 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 there are both pros and cons of this scenario. With an understanding of the tenancy in common 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 easier, 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, there are different degrees of ownership allowed which provides more flexibility than a joint tenancy.
Disadvantages of Tenancy in Common
There are some disadvantages of tenancy in common to also consider.
For example, when a mortgage is obtained to purchase commercial real estate, all of the borrowers agree to the terms and conditions of the loan together. When this happens, that means that 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 keep in mind 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 the 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 of the TIC will have 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. It is possible for one member of the TIC to 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, as well as 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.