Clear Answers and Explanations on Tenancy In Common (TIC)
What is a tenancy in common (TIC)?
The acronym TIC, which stands for tenancy in common and tenants in common, refers to arrangements under which two or more people have their names on the deed to a parcel of real estate without giving each other “right of survivorship”. In a tenancy in common, co-owners can own unequal percentages and can choose who will inherit their shares upon death. By contrast, with the type of co-ownership called joint tenancy, each co-owner must own an equal share and the share automatically passes to the other co-owners upon death.
References to tenancy in common and TIC can be confusing because the terminology is used to describe a variety of shared ownership arrangements with very different characteristics and purposes, and the issues critical in one context are often completely irrelevant in another. To cut through the confusion, it is useful to create categories and subcategories for different types of TICs. Start by distinguishing those that are created primarily for owners that intend to occupy the co-owned property from those that are created primarily to generate rental income and/or investment return, or to defer income tax through like-kind property exchanges (aka 1031 exchanges).
Within the world of owner-user TICs, there are: (i) space-assignment co-ownerships (or SACOs), the type discussed in this article, which assign particular houses, apartments, rooms, offices, stores, or storage spaces to each owner, and mimic a condominium; (ii) time-assignment co-ownerships (or TACOs), commonly referred to as today as fractional ownership arrangements or private residence clubs, which assign particular usage times or intervals to each owner and mimic timeshares; and (iii) equity sharing where one or more owner lives in the property, and one or more other owner is purely an investor. To make things even more confusing, many time-assignment co-ownership and equity sharing arrangements do not use a TIC structure (as discussed in other articles on this website).
This article will focus on SACO TICs, which look and feel like condominiums or other real estate subdivisions, and are most commonly formed for multi-unit residential properties such as apartment buildings, townhouses, and detached single-family residences located on the same lot. Each owner has the exclusive usage right to use or derive income from a particular apartment or house. This type of TIC can also be used for office buildings, storage facilities, or other commercial property, where each owner has the exclusive usage right to use or derive income from a particular suite or space, for undeveloped land, where each owner is permitted to build and occupy a home on a particular space, and even for a single shared home, where each owner has his/her own bedroom but the kitchen, living room and other areas are shared.
What is the difference between a SACO TIC and a condominium?
In a condominium or other formal subdivision, property has been legally divided into physical parts that can be separately owned. Each condo or lot owner owns a particular area of the property that is delineated on a map recorded in the public records, and has a deed that identifies the area that is individually owned. By contrast, TIC owners own percentages in an undivided property rather than the entirety of a particular unit or apartment, and their deeds show only their ownership percentages. The right of a particular SACO TIC owner to use a particular dwelling comes from a written contract signed by all co-owners (often called a TIC agreement), not from a deed, map or other document recorded in county records. The difference between physical division of ownership in county records (in a condominium) and an unrecorded contract allocating usage rights (in a TIC) is significant from both regulatory and practical standpoints, as discussed below. People opt for TIC conversion over condominium conversion because, under California law, local condo conversion restrictions do not apply to TIC conversions.
What is the difference between a TIC and a Co-Op?
In a stock cooperative or co-op, a corporation, LLC or other legal entity owns the property, and the owners of that entity each hold shares of, or membership interests in, the entity, along with usage rights to a particular apartment (often but not always expressed in a document called a proprietary lease). In most locations, a stock cooperative is legally recognized as a form of subdivision, and this recognition brings co-ops within the scope of local subdivision laws. As a result, restrictions on conversion of apartment buildings into subdivisions such as condominiums generally also apply to co-op conversions. This means that if you can convert an apartment building or multi-home property to a stock co-op, you can also convert it to condominiums, and you would always choose the condo conversion over the co-op conversion because condos are easier to sell and finance. On the other hand, if it is burdensome or impossible to convert to condominiums, the same difficulties will apply to a co-op conversion. As noted above, under California law applicable throughout the state, restrictions on condo and co-op conversions do not apply to TIC conversions.
Why have TICs become so popular?
Since SACO TICs first emerged as a viable form of home ownership in San Francisco, Santa Monica, and Berkeley in the mid-1980s, their popularity has steadily increased throughout California and, more recently, in some major metro areas of other US states. This increase in TIC popularity is reflected in larger numbers of TIC conversions, higher TIC resale prices (compared with similar condominiums), and improved TIC mortgage financing.
The higher volume of TIC conversions and sales has been driven by several factors. First, home prices have continued to rise, and many buyers cannot afford even an entry-level single-family home or condominium. Second, the advent of specialty TIC mortgages allowing each TIC owner to have an individual loan has dramatically lowered the risk of TIC ownership and made re-selling a TIC much easier. Third, condominium conversion restrictions have created a lack of older, more charming units on sale as condos, making TICs the only option for buyers looking for these types of properties. Fourth, rent controls and eviction restrictions are driving investors out of the landlord business and lowering the resale prices that other investors are willing to pay for rental properties.
Why not form an LLC or limited partnership instead of a TIC?
Limited liability companies (LLCs) and limited partnerships (LPs) are entities that can provide a variety of management and liability protection advantages compared with direct-titled co-ownership arrangements such as tenancy in common. But for owner groups who plan to occupy some or all of the co-owned property, the legal and tax disadvantages created by these entity structures generally outweigh the benefits. Specifically, under generally accepted interpretations of tax laws, owners of LLC interests, limited partnership shares or corporate stock are not considered to own real estate (unless the entity qualifies as a stock cooperative), and therefore cannot claim homeowner tax deductions for mortgage interest and property tax, or the $250,000/500,000 tax-free gain on resale. If the LLC, LP or corporation qualifies as co-op for homeownership tax deductions, it is likely to violate subdivision conversion laws as discussed above.
Can any building or lot be converted to a TIC?
A SACO TIC conversion is possible for an apartment building, a vacant lot (to prepare it for future construction), a lot with multiple detached residences, an office or industrial building, or any other property category. SACO TICs have also been used for mobile home parks, marinas, farms, co-housing, intentional communities, communes, underground disaster shelters, and numerous other property types.
Is TIC conversion legal everywhere?
In a series of cases decided between 1986 and 2007, California appellate courts have struck down every law (including zoning) that attempted to prohibit or restrict SACO TIC conversions. Most of the legal community believes that it is now settled California law that cities and towns are not permitted to ban or regulate SACO TICs. Consequently,, a SACO TIC can be formed for any building (residential, commercial, or mixed use) in any location in the state. Neither the location of the building, nor its zoning, size, layout, age, unit mix or construction, matter from a regulatory standpoint.
The legality of SACO TIC conversion outside California is less clear. In most other states and localities, there is no law on SACO TICs, effectively making TIC conversion legal and the right to do it unconditional. But location-specific research should precede any attempt to do a SACT TIC conversion outside California.
What legal restrictions apply to TIC conversion in California?
Although SACO TIC conversion is legal for every property in every city and town in California, certain requirements apply. First and most important, no document deeding or otherwise assigning usage rights can be recorded in public records. If a TIC deed states that a particular owner owns a specific unit or house, then the TIC is illegal and the owners (as well as their real estate agents, escrow officers, lenders, and anyone else involved in the transaction) can face civil and criminal penalties for violating subdivision laws.
In addition, creating a SACO TIC for a building with five or more units requires approval of the California Department of Real Estate (DRE). This approval requirement applies based on the number of units in the property, not the number of TIC interests to be created or sold. So, in the case of a five-unit apartment building, DRE approval is required even if the owner intends to sell only one TIC share. Resale of an interest in an existing SACO TIC is allowed without DRE approval, subject to rules defining what constitutes a true resale (as opposed to a sham designed to circumvent approval requirements).
The DRE approval process currently takes 4-6 months to complete. Our office has obtained DRE approval for more than 1200 large TICs for buildings up to 61 units in size, and every application we have submitted has been approved.
SACO TIC conversion for properties with four or fewer units does not require any sort of governmental approval. And, regardless of the number of units or lots being converted to a SACO TIC, it does not matter whether the building is vacant or tenant-occupied, and there are no required building upgrades, no tenant purchase rights, and no applications or notifications to local planning departments, building departments, etc.
What is included in a tenancy TIC agreement?
The following is a partial list of issues a SACO TIC agreement should cover:
- Division of the property into individual and group spheres with regard to usage rights and maintenance responsibilities;
- Description of the owners’ financial obligations including initial deposits, reserve accounts, taxes, common area maintenance and other expenses;
- Formulas for determining each owners’ monthly payment in advance and periodically adjusting the amount;
- Legal protections for banks providing fractional TIC mortgages;
- Management of the property including accounts receivable, accounts payable, regular reporting, maintenance and janitorial;
- Rules governing usage of the property by the owners (e.g. pets, noise, floor covering) and enforcement provisions;
- Meeting and decision making procedures;
- Provisions defining when a default has occurred and describing remedies;
- Sale of interests, group approval of prospective purchasers (if any), and rights of first refusal (if any); and
- Dispute resolution.
A common mistake in creating a TIC agreement is postponing resolution of difficult issues (“we’ll just work that out later”) to avoid uncomfortable confrontations and preserve a transaction. The problem is that the issues that seem most difficult to address are generally the most likely to lead to a dispute. Another common mistake is to assume everything will work out exactly as planned (particularly with regard to when people will occupy the property and whether and when they will sell). Housing plans are closely related to employment, health and domestic situations, and these regularly change in unforeseen ways. A good TIC agreement is durable enough to adapt to dramatic changes in occupancy and ownership plans without being renegotiated, and certainly should never cause one owner to sell his/her home as a result of another owner’s life changes.
A good TIC agreement should be comprehensive and well-organized rather than “short and simple”. The TIC agreement should be viewed as an insurance policy against expensive, time-consuming, and relationship destroying disputes. Even though the vast majority of TIC groups get along fine and never need to refer to their TIC agreements, the risk of needing to fall back on the TIC contract should not be ignored, even if the co-owners are long-time friends (or family) and have always gotten along well.
A TIC agreement should be long enough to cover every important issue, well organized (including an index or table of contents) so that a needed provision can be located quickly and easily, and written in language that is understandable yet sufficiently nuanced to avoid creating ambiguity or loopholes. In the unlikely event that you ever need to use your TIC agreement, you will want to be able to find a section that directly addresses your problem and clearly provides a solution. A “short and simple” TIC agreement is unlikely to directly address your specific problem, making it effectively useless. Moreover, ambiguities or omissions in the “short and simple” TIC agreement can be exploited by an aggressive owner or attorney to take advantage of the other owners.
How are TIC ownership percentages determined and what do they mean?
There is little consistency in how tenancy in common ownership percentages (as shown after each owner’s name shown on the recorded deed or deeds to the co-owned property) are determined. In some groups, each owner holds an equal share, while in others the shares are determined by the relative value or square footage of the assigned areas of the property. The ownership percentages are often used for the allocation of certain shared expenses, most frequently insurance and common area maintenance, but it is important to note that there is no legal requirement that any expense be allocated according to ownership percentage.
Many people incorrectly assume that SACO tenancy in common ownership percentages control owners’ resale prices, and/or division of proceeds if the entire property is resold or refinanced. In fact, a well-drafted SACO TIC agreement never allows ownership percentage to control resale or refinance proceeds allocation because such an arrangement would be unfair to owners who make wise investments in improving their space. An owner’s individual resale price should always be up to that individual owner and his/her buyer, and should never be determined or affected by his/her ownership percentage or by an appraisal of the entire property. In a resale or refinance of the entire property, proceeds allocation should be determined by an appraisal of the fair market value of each owner’s interest based on the qualities and amenities of the owner’s assigned areas.
How are TICs financed?
Historically, most SACO TICs shared one mortgage secured by the entire property. With this “group loan” arrangement, each owner paid his/her share of the mortgage payment as part of the monthly HOA dues, and the bank was paid from the group account.
TICs with a single shared mortgage are extremely rate today. Modern SACO TICs use individual TIC loans, also known as factional loans, where each TIC owner has a separate mortgage secured only by his/her TIC interest. Each owner can get his/her loan from a different bank, and is free to sell or refinance independently at any time.
Individual TIC loans offer two significant advantages over the old-fashioned group loan approach. First, a late payment or nonpayment by one owner does not affect any other owner. A payment issue only appears on the credit report of the owner who is at fault, and a bank foreclosure only involves that particular owner’s TIC interest. Second, a sale or refinance by one owner does not require the consent or cooperation of any other owner. As a consequence of these advantages, real estate agents report that TICs with individual TIC mortgages sell faster and fetch prices at least 25% higher than TICs with group loans.
Although the list of lenders that offer individual TIC mortgages remains relatively small, and no 30-year fixed-rate TIC loans are available, both the number of lenders and the variety of loan products continue to increase.
How do individual TIC mortgages work?
Each individual mortgage involves a note signed only by the owner of a particular TIC interest, secured by a deed of trust covering only that interest. If the borrower is late or defaults, the lender can only report the problem on the borrower’s credit report and can only foreclose on that borrower’s TIC interest. When a foreclosed TIC share is sold, the buyer acquires the defaulting borrower’s interest.
Individual TIC financing is not the same as individual condominium financing, and does not turn a TIC into a condominium. Since TIC properties have not been subdivided, an individual TIC mortgage cannot be secured by a particular unit or home. So, just as TIC owners rely on the unrecorded TIC agreement (rather than a deed) for their right to occupy a particular home, TIC lenders must rely on the TIC agreement (rather than their trust deed or mortgage) to guarantee that they will be able to deliver those same occupancy rights to a foreclosure sale buyer.
Why would a TIC choose a group loan?
Although the old-fashioned TIC group loan has become quite rare, it is still used in certain situations. Some TIC owners opt for group loans because they feel the advantages of having the 30-year fixed-rate loan outweigh the risks and inconveniences of sharing one mortgage. Other TIC owners choose group loans because a member of the group cannot qualify for his/her own mortgage, and they want the more financially qualified owners to offset the financially weaker ones on the loan application. Still other TIC groups choose group loans because the rates are slightly lower, or because individual TIC mortgages are not yet available in their location.
With a TIC group loan, how is each owner’s payment determined?
When a group loan TIC is first formed, each owner’s down payment is subtracted from his/her purchase price to determine how much of the group loan that owner is responsible to repay. The difference between an owner’s purchase price and down payment is his/her loan amount or loan share, and is divided into the total amount of the group loan to determine that owner’s loan percentage. The loan percentage determines how much of the monthly payment on the owner must pay.
For example, imagine that Jane and Bill are buying a two unit building together for $1,000,000. Jane, who will have the right to live in the better unit, is paying $600,000 for her share, and Bill is paying $400,000 for his share. The $600,000/400,000 split of the price is based upon the relative value of the two units in the building. Bill, who has more savings than Jane but a lower salary, is making a down payment of 25% of his price ($100,000). Jane, who has little savings but a good job, is making a down payment of 10% of her price ($60,000). The TIC group loan amount will be $840,000, which is the difference between the $1,000,000 purchase price and the total down payment of $160,000 ($100,000 from Bill and $60,000 from Jane). Bill’s loan amount is $300,000 (400,000-100,000), and his loan percentage is 35.71% (300,000/840,000). Jane’s loan amount is $540,000 (600,000-60,000) ), and her loan percentage is 64.29% (540,000/840,000). If the monthly payment on the TIC group loan is $4,200, Bill will pay $1,500 and Jane will pay $2,700.
Assuming Jane and Bill each pay exactly his/her share of the group loan payment each month, the loan percentages will never need to be adjusted. The gradual decrease of the amount owed over time (due to loan amortization) will not affect the loan percentages. The loan shares will require adjustment only if an owner decides to pay more than his/her regular monthly payment (perhaps to pay down his/her loan amount more quickly). When loan percentages differ dramatically from ownership percentages, extra documentation should be used to provide additional security to the owner with substantially greater equity.
How can the risks of TIC group loans be managed?
The most obvious risk of TIC group loans is that a late payment or nonpayment by one owner will blemish the credit rating of the other owners or, in a worst-case scenario, cause all the owners to lose their homes and their equity. TICs with group loans typically manage the risk of late payment or nonpayment by: (i) undertaking a complete investigation into the background and qualification of potential owners before allowing them to join the group; (ii) requiring a similar evaluation each time a TIC interest is resold; (iii) making sure all payments on the group loan are made from the group bank account (rather than directly from each owner to the lender); (iv) keeping a large reserve fund that can be used to make payments while a non-paying owner is sold out of the group; and (v) creating a powerful and efficient internal enforcement and foreclosure system.
A less well appreciated risk of TIC group loans is that the inter-twined financing will complicate or prevent resale. Most loans contain a “due on sale” clause that prohibits TIC interests from being sold without the bank’s permission (which, in practice, is rarely given unless the loan is “assumable” as discussed below). Additionally, as the TIC property increases and the loan principal is paid down, an increasingly large gap develops between the value of the TIC interests and the balance of the group loan. This means that, even if the bank approves the sale, or the TIC owners are willing to take the res of violating the “due on sale” clause, any buyer would need a large down payment.
The group loan resale risk can be partially mitigated in two ways. One approach is to have a group loan that is assumable or, better yet, partially assumable, so that a new buyer can be substituted without refinancing, preferably with a relatively light paperwork load and without having to pay a large fee. Unfortunately, assumable mortgages have become somewhat difficult to find, and partially assumable ones are very rare. Moreover, an assumable or partially assumable loan does nothing to address the gap that generally develops between the property value and the loan balance, and the resulting need for TIC buyers to make larger and larger downpayment as the group loan ages.
The second and more common way to partially mitigate the group loan resale risk is for the TIC agreement to include a fair and balanced approach that allows any single owner too force the group to refinance. To understand why this is important, imagine the predicament of an owner in a group loan TIC that needs to move to accommodate a growing family or a job relocation, but who signed a TIC agreement that requires unanimous approval for refinancing. Back when the owner entered into the TIC, he/she expected to stay in his/her home for at least 30 years, and thought that, if there ever was a need to move, the other owners would surely understand and cooperate. In the event, one or more of the other owners (while sympathetic) does not want to deal with the hassle of refinancing, or perhaps can no longer qualify for a loan.
A well-drafted group loan TIC agreement allows any owner to force a refinance, but balances the costs and risks by: (i) limiting the amount of refinance proceeds so that one owner cannot use another’s equity; (ii) imposing all loan origination costs on the owner or owners receiving cash proceeds; and (iii) carefully allocating the financial burden created if the new loan is at a higher interest rate than the old one.
What is TIC wraparound financing?
Although the vast majority of modern SACO TICs use individual TIC loans, and most of the rest use group loans, there is a third TIC financing option. In wraparound or all-inclusive TIC financing, the old mortgage that was on the property before it was converted to a TIC remains in place, and the pre-TIC owner continues to be the only borrower on that mortgage. Each TIC buyer obtains a separate loan from the pre-TIC owner and makes monthly payments to that person who, in turn, makes the payments to the bank. For the TIC buyers, wraparound TIC financing eliminates the risk that one buyer’s mortgage default will blemish another buyer’s credit, or worse, cause another buyer to lose his/her home and investment. It also allows the pre-TIC owner to charge an interest rate markup and to defer capital gains taxes using the installment sale method. Remember that the use of individual seller-wrapped financing does not circumvent the due-on-sale requirements in the old mortgage (also known as the “underlying loan”), so the pre-TIC owner must get the original lender’s permission for the sale. Also, the separate TIC loans carried by the pre-TIC owner should not themselves be due on sale because that would make resale difficult; rather, each TIC loan should be assumable by a qualified buyer.
How are TIC property taxes allocated?
In most California counties (including San Francisco and Los Angeles), TIC buildings receive a single property tax bill, and each TIC owner pays his/her property taxes as part of monthly HOA dues. The division of the property tax bill among the TIC owners is determined by the language of the TIC agreement. A well-drafted TIC agreement should divide property tax based upon each owner’s purchase price. This arrangement ensures that a TIC resale by one TIC owner will not cause the other TIC owners’ property taxes to go up.
There are some nuances to the purchase-price based TIC property tax allocation model. When the owner of an entire property sells some TIC shares but retains an ownership interest, his/her property tax allocation should be based on the pre-sale assessed value (meaning that the seller’s property tax actually decreases rather than increases after the sale). When property tax increases as the result of some non-sale-related activity (such as an improvement), the entire increase should be paid by the owner who triggered the increase. When property tax increases as the result of the annual inflation adjustment, an increase in the applicable tax rate, or a reassessment unrelated the activities of a particular TIC owner, the increase should be allocated among all the TIC owners according to property tax allocation percentages derived from the previous purchase prices and improvements.
How are other TIC expenses allocated?
TIC expenses are generally divided into individual costs and group costs. Individual costs include maintenance and improvements to unit interiors, personal property insurance, and separately metered utilities; these individual TIC expenses are paid directly by the owners. Group costs include building insurance, property taxes, maintenance and improvements to common areas, shared utilities like water and trash removal, and mortgage payments (when there is a group loan); these group TIC expenses are paid through a group bank account using a monthly assessment (aka HOA dues) system. Under this system, each owner makes a single monthly payment to the HOA account. The monthly payment is based upon the total of the owner’s share of each of the anticipated group expenses. To add predictability and protect against default, even semi-annual and annual expenses, like property taxes and insurance, should be included in the owners’ monthly TIC homeowners association dues.
How are TIC decisions made, and what’s the best way for TIC owners to avoid deadlocks and disputes?
TIC owners, like condominium owners, must collectively accomplish certain basic tasks in order to live comfortably in their homes and preserve their investments. For example, TIC owners must perform basic maintenance of common areas (such as fixing the roof when it leaks and painting the exterior when it peels) and pay essential bills (such as property taxes, insurance, water, etc.). Ensuring that these basic tasks are accomplished, even when the owners are not getting along, is a central purpose of the TIC Agreement, and is just as important in a two-unit building as it is in a 100-unit building.
The imperative of preserving each TIC owner’s quality of life and investment underlies the most important principal in TIC decision-making: that not all TIC decisions can be made by owner vote. To understand why this is so, imagine the result if a disgruntled owner could refuse to approve repairing a leaky roof or paying the property taxes unless he/she gets his/her way on some unrelated issue. These examples illustrate why a well-drafted TIC agreement must mandate certain functions (such as making basic repairs or paying important bills).
So, the starting point for creating a functional TIC owner group is to distinguish between those actions that are mandated by the TIC agreement and those that are left to owner decision-making. For example, a well-drafted TIC agreement requires that the group repair a leaky roof and empowers any individual TIC owner to force the repair without having to get one or more other owner(s) to agree.
Within the category of decisions that require an owner vote, the TIC agreement must clarify which decisions can be made by a the group manager (if there is one), which decisions require a majority vote, and which decisions require a higher level of approval (such as a supermajority or unanimous vote). In larger TIC associations, which typically have a board of directors, there is an additional category of decisions that can be made by that board.
This hierarchy of decision-making has proven to be very effective at avoiding TIC owner deadlock and disputes over the course of the 35 years that our office has been preparing TIC documentation (encompassing more than 8,000 TIC groups). Fewer than 2% of the groups for which we have created TIC agreements have required mediation, arbitration, or court intervention, an incidence that is lower than condominium associations.
How are TICs managed?
Regardless of the number or units or owners in the TIC, it is critical that responsibility for key management functions (such as collecting the HOA dues, paying the bills, arranging common area repairs, etc.) be assigned to a particular person. Informality (as in “we’ll all just pitch in” or “we’ll just work it out”) generally translates into inaction, resentment by the most conscientious or compulsive group member(s), and dispute, and this is at least as true with two-unit TICs as it is with larger groups). It is always wise to have a formal management structure built into the TIC agreement, even if you intend to try handling things informally. That way, if things do not go as planned, or the informal approach seems to be failing from the perspective of one or more owner(s), the more formal structure is available as a fall-back arrangement.
Is it hard to sell a TIC?
Each TIC owner is free to sell can sell his/her TIC at any time and, contrary to what many people unfamiliar with tenancy in common assume, SACO TICs have been readily re-salable for the past 35 years (including during several severe economic recessions). Sales of TICs with group loans are typically subject to rights of first refusal and buyer approval to ensure that the co-owners can vet prospective buyers; but these types of restrictions are rare today because most TICs have separate, individual TIC mortgages, and the lenders who originate fractional TIC loans will not allow rights of refusal or rejection.
How are TICs first created or formed?
Most TICs are created when a property seller or his/her Realtor makes an elective decision to convert a property to a TIC and market the TIC interests. This type of formation works best when the seller or Realtor obtain a TIC agreement before marketing (as discussed below), and each buyer is given the opportunity to review and approve the TIC agreement before making a final committing to close of a purchase.
In some cases, a buyer or group of buyers creates the TIC. For example, an individual buyer might assemble a group of family or friends, use a qualified Realtor to locate a building, agree on the assignment of ownership percentages and units, and then work with an attorney with tenancy in common experience to create the TIC agreement.
How does a property owner or real estate agent convert a property to a TIC and sell TIC interests?
In the case of California property with up to four units or homes, the conversion to a TIC is fast, inexpensive and simple. The first step is to contact a qualified attorney to prepare tenancy in common documents including a TIC Agreement. This can generally be completed in 1-3 weeks at a cost of around $2,400. As soon as the documents are prepared, TIC marketing can begin.
In the case of a larger California properties, approval from the California Department of Real Estate (DRE) is required before marketing can begin. The first step in getting DRE approval for a large TIC is assembling and submitting an application. The cost of assembling this application varies depending on the professionals employed, but a general rule of thumb is about $23,000 including all professional and governmental fees (of which about $4,500 is attorney fees). For more information, please see the articles in the section of our website entitled TIC Guidance For Sellers and Their Realtors.
Why would an owner or Realtor selling an entire property obtain a tenancy in common agreement? Why not let the buyers get their own TIC Agreement?
Although it is theoretically possible to gather an entire buyer group, have them prepare a single offer as a group, then allow them the time and flexibility to create their own tenant in common agreement prior to close (while the property is held off the market), this approach fails much more often than it succeeds and consumes a huge amount of effort and time even when successful. Most sellers and Realtors find it much easier and more productive to accept individual offers from prospective buyers of each fractional share even when they intend to simultaneously close the sales to all the buyers at once. (Note that closing the sales one at a time is also possible, as discussed below.)
Accepting individual offers on the tenant in common shares is virtually impossible without having a shared ownership agreement in place. Since the property has not been subdivided, the owner cannot legally accept offers on particular units or houses. Each individual purchase contract needs to describe what is being purchased as a percentage of the entire property. The structure created by the TIC agreement is necessary to avoid the uncertainty and risk that would otherwise be associated with a series of purchase contracts for percentages of the building. The need for a pre-marketing TIC agreement is the same regardless of whether the owner plans to allow individual TIC sales to close separately or insists that the entire property be sold at once.
Is it possible to sell tenancy in common shares in one at a time?
The practice of selling tenants in common shares one at a time is not only possible, it has become very common in recent years, and is used both by sellers who are interested in selling an entire property as quickly as possible, and by sellers who only wish to sell shares as rental tenants vacate. For the former, this approach eliminates the risk that Buyer #1 will be lost before Buyer #4 is ready to close. For the latter, this approach allows an owner to get the maximum sale price for his/her building without evicting any tenants, and enables the owner to keep a stake in the building while simultaneously diminishing carrying costs and management responsibilities. The downside of selling the TIC interests one at a time is that the owner must share control with others and rely on their financial strength. But many owners are realizing that they already share control of the building with their tenants and rely on their tenants’ incomes. Unlike co-owners, these tenants have no investment in the building and everything to gain from fighting with the owner. The reality may be that while having co-owners is risky, having tenants is much, much riskier.
Can a seller put the proceeds of a tenancy in common share sale in a 1031 tax-deferred exchange?
Each tenants in common share sale can be treated as a separate transaction for the purpose of calculating capital gains tax, and the proceeds from each can be placed in a 1031 tax-deferred exchange. Alternatively, several TIC sales can be grouped together for exchange purposes provided they occur at the same time or within a relatively short period. But if you provide seller financing for the sale, the amount of this financing will be considered taxable boot unless you take precautionary measures. If such measures would be impractical under your financial circumstances, you can often achieve a favorable tax result by using installment sale tax treatment. Another alternative to a 1031 tax-deferred exchange might be a private annuity trust or “PAT”. Consult you tax or financial advisor for further information on these issues.
What are the buyer’s steps in a tenancy in common purchase?
A prospective tenancy in common buyer should always evaluate the financial strength of the other group members, even where the TIC will not involve shared financing. If a TIC agreement has already been prepared, the buyer should retain an experienced tenancy in common attorney to review the agreement and to raise and explain the many important issues associated with group ownership. If no tenancy in common agreement exists, the most efficient and economical approach to creating one is for the entire group to retain a single attorney to prepare a TIC agreement that is specifically tailored to property and the group’s needs. Each participant may then have the draft agreement reviewed by his or her own attorney and accountant, and bring the comments of these outside experts before the group for discussion and further revision of the agreement. For more information, please see the articles in the section of our website entitled TIC Essentials For Buyers and Their Realtors.
Does a SACO tenancy in common (TIC) provide the same tax benefits as other real estate?
Owner-occupants may deduct their mortgage interest and property taxes, and often may avoid capital gains tax on resale. Owner-investors declare their income and expenses, including depreciation, and may undertake a tax-deferred exchange.
Are tenancies in common risky?
All co-ownership forms (TICs, condominiums, cooperatives, partnerships, etc.) involve greater risk than owning individually. These risks need to be carefully evaluated, then weighed against the benefits of co-ownership such as lower acquisition cost and lower ongoing maintenance and management burdens.
Most tenancy in common buyers are interested in comparing the risks of tenancy in common ownership to the risks of condominium ownership. In making this comparison, it is important to note that condominium ownership involves many of the same risks as TIC ownership, including those created by shared obligations such as common area maintenance and insurance, those created by the need for joint management and decision making, and those created by living with other co-owners in close proximity (noise, pets, parking, alterations etc.). The most significant additional risks associated with tenancy in common ownership are (i) larger shared obligations such as property tax and (in some cases) group loans, (ii) greater complexity and cost in resale and refinancing, and (iii) reliance on an unrecorded co-ownership agreement.
About the Author
SirkinLaw APC was a pioneer in the area of tenants in common (TIC) arrangements involving occupancy rights assignments, which are often used as a substitute for subdividing a property when true subdivision is impossible or unduly expensive. In 1985, Andy Sirkin created the legal and transactional structure which has become the industry standard for this type of TIC. Over the succeeding years, Andy’s innovations have included being the first state-approved real estate instructor for occupancy-based TICs, being the first to obtain state approval for a large-building TIC sale, being the first to convince institutional lenders to offer individual TIC financing, and being the first to develop the loan documents and lender underwriting guidelines for fractional TIC financing. In recent years, the type of co-ownership arrangement Andy conceived nearly 30 years ago has grown to sometimes comprise approximately 1/3 of all attached-home sales in San Francisco.
SirkinLaw APC has prepared close to 5,000 occupancy-based TIC agreements for properties of every size and type, and continues to assist in the vast majority of these transactions in California. This unmatched level of experience allows us to offer time-tested approaches for the vast majority of co-ownership situations, to quickly and effectively solve problems, and to produce documents that are clear, easy to navigate and read, and efficient and cost-effective to enforce. We continue to improve our documents each month as we encounter new situations and learn more about what TIC arrangements perform best in the real world. We also share our accumulated knowledge, and support real estate professionals and the TIC community, by continuously publishing new articles on our website and offering free educational workshops.
Our tenancy in common practice involves general advice and counseling, TIC agreement preparation, loan documents, and ongoing consultation to developers, seller, Realtors and TIC owners, on either a flat fee or hourly basis. We have a well-deserved reputation for returning calls promptly and providing fast turnaround times. But more important, we are known for finding creative solutions, calming fears, and finding common ground, so that transactions and relationships work. Although our role usually begins at the time the tenancy in common is first formed or sold, we are committed to remaining available to solve problems throughout the life of each TIC. Contact us via our contact form.