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What is Tenants In Common?

There are many different, complex concepts involved in the field of real estate business, but one key term that you need to be aware of is Tenants in Common (TIC). In case you are wondering, what is Tenants in Common, have no fear: at First Guardian Group, we have the information you need to master and define tenants in common for more effective real estate management.

The Definition of Tenants in Common

Tenants in Common (TIC) can be defined as a form of real estate ownership where at least two people own an undivided interest in the same property at the same time. In contrast to a joint tenancy, TIC property owners do not have a right of survivorship meaning that, if one party dies, their ownership interest does not automatically pass to the remaining TIC owners and they can designate non-property owners to inherit their interests upon death. TIC owners do not have ownership of specific areas of a property; all owners have interests in the entire property based on the respective amounts that they originally invested. Ownership interests do not need to be equal. Mary might own 40% of the property and Joe could own 60% of the property.

Since Tenant in Common owners do not own separate portions of the property, they must cooperate with each other to reach agreement on property matters including leasing and selling the property, among other matters. In general, when at least two people, at the same time, hold the same title to the real property there must be more than one individual involved for the holding to qualify as Tenants in Common. It is also important to differentiate Tenants in Common from similar yet separate forms of concurrent ownership such as joint tenancy and tenancy by the entirety.

Tenants in Common and 1031 Exchanges

In 2002, the IRS issued Revenue Procedure 2002-22, which set forth conditions under which properties with Tenants in Common ownership structures could qualify as “like-kind” for purposes of completing a tax-deferred 1031 Exchange. The Revenue Procedure sets forth a comprehensive list of items that must be adhered to for the TIC structure to qualify for 1031 Exchange “like-kind” treatment including the following:

1. Each TIC owner must hold title either directly or through a disregarded entity such as a single person LLC (SPE).

2. A maximum of 35 persons is permitted (husband and wife are treated as a single person).

3. Co-owners must unanimously approve:

  • The hiring of any property manager, including any future contract changes, negotiation or renewals
  • The sale of the property
  • Property Leases
  • Any loans or encumbrances

For all other actions, a vote of those co-owners holding more than 50 percent of the property interests is deemed acceptable.

Why TIC Structures Have Fallen Out of Favor

Shortly after the IRS permitted the use of TIC ownership structures to qualify as “like-kind” exchanges, there was an explosion of investment that was funneled into TIC structures coinciding with broad and often aggressive advertising from real estate syndicators who promoted the following chief benefits to prospective investors:

– Treatment as “like-kind” property by the IRS allowing full 1031 Exchange benefits both on acquisition and sale of properties

– Fractional ownership in a professionally managed institutional grade property relieving investors of day-to-day management hassles

– Opportunity for greater diversification in multiple properties and locations due to lower investment minimums that might be required for wholly owned real estate

Investments in TIC properties peaked in 2006-2007 and began to fall out of favor with a growing number of investors due largely to 1) poor performance by many managers who failed to achieve their advertised projections and 2) growing awareness among investors of problems in achieving unanimous consent among larger groups of co-owners on key property decisions. The real estate crisis of 2008-2009 accelerated discontent with the TIC structure and most lenders stopped lending to larger groups of TIC co-owners due to losses that they had experienced caused in part by the need to have all owners agree on important property decisions.

The Tenant in Common ownership structure remains popular for smaller groups of owners (typically less than 5) who generally are related or know each other and who lenders have greater assurances that the co-owners can work in harmony to make key property decisions.

Why DSTs Have Now Surpassed TICs in Popularity

The Delaware Statutory Trust (DST) is an ownership structure that has several features in common with the TIC structure including:

–  Acceptance by the IRS as a “like-kind” ownership structure for purposes of 1031 Exchanges, see Revenue Ruling 2004-86

– Ownership in a professionally managed institutional grade property with little to no day-to-day responsibilities

– Diversification opportunities due to even lower minimum investment requirements due to a much larger number of permitted co-investors in each property (typically up to 500 for a DST versus a limit of 35 for a TIC)

For investors seeking generally hassle-free, stable income with full 1031 Exchange benefits in/out, DSTs are now far more popular than TICs for the following primary reasons:

– Track record of performance is generally much better thus far for DSTs than TICs due in large part to requirements that DST sponsors/managers have much more “skin in the game” e.g., the sponsor is solely responsible for any loans on the property

– Trustee makes all property decisions thereby eliminating potential disagreements and deadlocks between co-owners on key property matters

–  Due to abuses and losses experienced by many TIC investors, DST sponsors are generally held to a higher standard of qualification and performance before brokers and reps will approve their offerings for investment by their clients

Summary

The Tenant in Common ownership structure can be a preferred option for especially smaller numbers of investors who wish to co-own properties and who can be expected to cooperate to make property decisions. The TIC structure is especially appealing to 1) investors who wish to retain the ability to transfer their property to heirs of their choosing, and 2) by following IRS guidelines, take advantage of 1031 Exchange tax deferral options that are not available to other forms of ownership, e.g. partnerships. The DST structure has now become more popular among investors seeking hassle-free income with full 1031 Exchange benefits.


BIO : Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.



Disclaimer
There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.