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
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.