Owning Real Property as Tenants in Common

Owners of commercial property have increasing found benefit in owning their separate interests in the property as “tenants in common.”  Typically, if two or more parties wanted to jointly own a commercial property, the typical approach would be to form a limited liability company (LLC) to hold title to the property and the ownership interests of the LLC would be held in varying percentages by the parties. Most of the time, this will remain the preferred approach.

However, when one or more of the parties wants to use funds held in a 1031 exchange for the property purchase, holding title to the property as a tenants-in-common interest (TIC Interest) is a better option.

A TIC Interest is an undivided interest in the real property, which can be bought or sold separately from the other undivided interests in the property and can be separately mortgaged. 1031 exchange funds can be used to purchase a TIC Interest, but cannot be used to buy a partner’s equity interest in an LLC.

The parties that collectively own the TIC Interests a property will enter into a Tenants in Common Agreement (TIC Agreement) which sets out the terms and conditions upon which each will hold their respective TIC Interests and specifically elects to be excluded as a partnership under the Internal Revenue Code.

The TIC Agreement, will address property management, how income, expenses and liabilities of the property will be handled, and remedies that will be taken if a tenant in common doesn’t pay his or her proportional share of property expenses, and also identify other tenant in common obligations, such as compliance with loan obligations that affect the property as a whole.

If the property as a whole will be mortgaged, the lender may require additional provisions be added to the TIC Agreement for so long as the loan is outstanding, particularly if the loan will be a CMBS loan.

While TIC Agreements do not have to be lengthy or complicated, it is critical that the parties enter into such an agreement while the interests are held as TIC interests.  If even one of the tenants in common fails to cooperate or pay proportional expenses, then the other TIC owners need the ability to take action against the other owner.

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