Tenancy In Common (TIC) — An Introduction

By Andy Sirkin

The Many Types of Tenancy In Common Arrangements

As the price of real estate continues to rise, and communities adopt ever stricter growth and condominium conversion restrictions, more and more people are turning to tenancy in common and other non-traditional shared ownership structures as a way to maximize their buying and selling power. These arrangements lower prices and increase choice for buyers by allowing them to pool resources and buy more real estate than they otherwise could or would, while agreeing among themselves on an allocation of rights and responsibilities so each buyer does not end up with more than he/she needs. At the same time, tenancy in common arrangements increase sale prices and marketing options for sellers buy allowing them to sell fractions of their property to buyers for prices that generally add up to more than what the seller would receive from a single buyer. The popularity of tenancy in common has been further enhanced by the recent introduction of fractional loans which allow co-owners to have individual mortgages which substantially decrease the risk of co-ownership. Today, tenancies in common are one of the most common types of homeownership in San Francisco, becoming increasingly popular in other California locations (especially Oakland/Berkeley, Santa Monica, Hollywood, Laguna Beach, San Diego, and throughout Marin and Sonoma Counties), and emerging in communities outside California such as New York, Boston, Seattle and Portland.

What is a tenancy in common?

Tenancy in common (also known as TIC and tenant in common, and co-tenancy) refers to arrangements under which two or more people co-own a parcel of real estate without a “right of survivorship”. This type of co-ownership allows each co-owner to choose who will inherit her ownership interest upon death. By contrast, the type of co-ownership called joint tenancy requires that each co-owner’s interest pass to the other co-owners upon death.

The tenancy in common structure has become a popular style of ownership in many different real estate contexts. For example, income property investors and real estate syndicators are increasingly using tenancy in common as a vehicle to facilitate income tax-deferred exchanges, a trend that has been propelled by recent IRS rulings recognizing certain tenancy in common structures as legitimate vehicles for these exchanges. At the same time, vacation home buyers and resort developers are increasingly using tenancy in common (often called “fractional ownership” in this application) to share ownership and usage of vacation properties so that owners need not buy more than they can use and afford, but still get legal title to real estate (unlike in a traditional “time share” arrangement).

This article will introduce you to a third common usage of tenancy in common which is the co-ownership of multi-unit residential property by co-owners who each wish to have exclusive usage rights to a particular dwelling unit. You can find more complete information in the article entitled Understanding Basic TIC Concepts and Structure. This type of tenant in common co-ownership should not be confused with the legal subdivision known as the condominium. In a condominium project, the property has been legally divided into physical parts which can be separately owned. Each condo owner owns a particular area of the property which is delineated on a map recorded in the county records, and has a deed which identifies the area which is individually owned. By contrast, tenancy in common owners own percentages rather than particular units or apartments. The right of a particular owner to use a particular dwelling comes from a written contract signed by all co-owners (often called a tic agreement, a tenancy in common agreement,  a tenants in common agreement, or a co-tenancy agreement), not from a deed, map or other document recorded in county records.

Is tenancy in common legal?

The difference between physical division of ownership in county records (as in a condominium) and an unrecorded contract allocating usage rights (as in a TIC) is significant from both regulatory and practical standpoints. On the regulatory side, California appellate courts have recognized a distinction between recorded and unrecorded documents assigning usage rights, and this distinction means that local laws restricting or prohibiting the conversion of apartment buildings into legal subdivisions such as condominiums do not apply to the creation of a tenancy in common arrangement. Consequently, tenancy in common formation does not require any filing or approval with local governmental agencies. On the practical side, the absence of deeded rights makes tenancy in common ownership considerably more risky than condominium ownership, even where the TIC owners have separate financing. The increased risk is generated by the fact that the owners are relying on the validity of the tenancy in common Agreement for their usage rights, and it is possible to imagine legal circumstances under which this validity might be undermined.

What’s the difference between a tenancy in common and a co-op?

Tenancy in common co-ownership must also be distinguished from the legal subdivision known as the stock cooperative or co-op. In a co-op, a corporation or other legal entity owns the property, and the owners of that entity each hold shares of the entity along with usage rights to a particular apartment (often but not always expressed in a document called a proprietary lease). A stock cooperative is legally recognized as a form of subdivision under California Law, and this recognition brings coop ownership within the scope of most local subdivision restrictions and regulations. As a result, laws that restrict or prohibit the conversion of apartment buildings into legal subdivisions such as condominiums generally impose those same restrictions and prohibitions on the conversion of apartment buildings into stock cooperatives.

Can you get a mortgage for a tenancy in common?

Today, most tenancy in common owners have their own, individual TIC loan. These fractional mortgages are secured only by one co-owner’s TIC share in the property, meaning that one owner’s mortgage default does not imperil the other owners. Individual tenancy in common loans are now readily available in the San Francisco Bay area, and increasingly available in other locations in and out of California.

For situations where separate tenant in common mortgages is not available, TIC groups share one mortgage. Under this arrangement, the tenancy in common agreement specifies the percentage of the loan owed by each co-owner, who contributes his/her share of each loan payment as part of his/her monthly homeowners association dues. Obviously, this arrangement creates the risk that a co-owner who has paid his/her share could nevertheless face foreclosure because another co-owner failed to pay. TIC groups typically manage this risk by keeping reserve funds which can be used to pay expenses while a non-paying owner is sold out of the group. Practically speaking, although more than 5,000 of these groups have been formed, co-owner default is extremely rare, and there has been no instance of mortgage foreclosure on a TIC group loan.

How does a tenancy in common operate?

Tenancy in common group expenses, including building insurance, property taxes, maintenance and improvements to common areas, shared utilities like water and trash removal, and mortgage payments (where there is a shared mortgage rather than separate, individual TIC loans), are paid through a group bank account using a monthly assessment system. Under this system, each owner makes a single monthly payment to the group account. The monthly payment is based upon the total of the owner’s share of each of the anticipated group expenses. Most groups also have two different types of reserve or contingency funds, one for future repair and replacement of common areas such as exterior paint and roofing, and one to help pay common expenses in the event an owner fails to pay his/her share. Each owner has the responsibility to maintain his/her assigned areas, and the ability (within specified limits) to alter and improve such areas.

Each owner can sell his/her interest at any time and, contrary to what many people unfamiliar with shared ownership assume, tenant in common interests have been readily re-salable for at least the past 30 years. Sales of TIC interests involving group loans are typically subject to rights of first refusal and buyer approval to insure that the co-owners can vet prospective buyers and make sure they are qualified. Also, it is critical that all tenancy in common group financing be assumable so that re-sales can occur without refinancing. Even where the group mortgage is assumable, the Tenancy In Common Agreement must provide a system under which sellers can force a refinance in case the existing loan is not large enough to accommodate the sale. The “forced refinance” provisions must be balanced to insure that the cost of the loan is paid by the seller or buyer, and that the equity position and monthly payments of the non-selling owners are protected.

Does a tenancy in common require city approval?

Although TIC formation does not require approval of City or County governments, it does require the approval of the California Department of Real Estate (DRE) if the property to be co-owned and occupied by the group contains five or more residential units. The DRE approval process currently takes 6-9 months to complete, and results in the issuance by DRE of a Public Report. The Public Report contains extensive information and disclosures about the property and the TIC group, and must be given to all prospective buyers. Resale of TIC interests are generally allowed without a Public Report, but the rules defining what constitutes a true resale (as opposed to a sham designed to circumvent approval requirements) are strict.

Does it make sense to buy a tenancy in common?

The sustained and steadily increasing popularity of owner-occupying apartment buildings as tenancies in common is testimony to the structure’s value for both buyers and sellers. But tenancy in common is not for everyone, and prospective buyers and sellers need to carefully weigh the risks and benefits before engaging in a tenancy in common transaction. For apartment building owners, the most important factor to consider is the likely receptiveness of the local homebuyer market to TIC ownership, and the resulting differential (if any) between the value of the building if sold to owner-users rather than an investor. For home buyers, the key factor is whether an equivalent condominium (in terms of amenities and location) is available and, if so, whether the TIC/condo cost differential justifies taking the increased risk associated with TIC ownership.


About the Author

D. Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership 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 comprise approximately 1/3 of all attached-home sales in San Francisco.

SirkinLaw APC has prepared close to 3,000 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.