Tenant in Common (TIC)

Tenancy-in-Common is the default form of co-tenancy, where co-tenancy describes how property can be held by more than one person at a given time.  With a Tenant-in-Common co-tenancy, each owner is regarded as owning separate and distinct shares of the undivided property.   Co-Tenants receive a deed and title insurance for their percentage interest in the property and can independently encumber their share by taking out a mortgage.  Tenancy-in-Common shares in a property may be of different sizes, and will be probated in the event of the death of the owner. 

The Tenant-in-Common (TIC) structure is a mechanism that allows individual investors to pool their resources in real estate deals.  TIC has become an important vehicle in the commercial real estate market since 2002, when the IRS issued regulations that allowed, under specific circumstances, that Allowed TICs to be used in 1031 exchanges.  A TIC sponsor, who is usually a trust subsidiary, real estate investment company or entrepreneur, arranges the structure. The sponsor will identify the property, perform the due diligence, enter into the purchase and sale agreement, arrange financing and sell TIC interests to investors.  The responsibilities of the various TIC investors are outlined in the TIC agreement (just as an operating agreement outlines the responsibilities of partners in a partnership). Also, the individual TICs sign additional documents giving the TIC sponsor the right to handle the day-to-day operations of the property. 

A primary advantage of a TIC is that the real estate investment properties are, in effect, pre-packaged by the TIC sponsor.  This includes the required due diligence paperwork; such as title insurance, environmental, tax opinion and study lease documents. This due diligence word greatly reduces the up-front costs that the individual investor would incur if they sought out the investment independently and eliminates any of the conventional landlord’s headaches.

TICs may be packaged in one of two ways, securitized or non-securitized.  

  • Securitized TICs represent the majority of TICS offered by sponsors, are subject to regulation by the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD), and may only be sold by registered securities dealers. The management of the TIC is typically by the TIC's sponsor, and may include multiple properties.  

  • Non-Securitized TICs are structured as straight real estate investments, not governed by the SEC or NASD, and are sold by real estate licensees. Sponsor is not involved in the management of the TIC, but may retain an ownership position.  Each TIC typically involves only one real estate property.   

Any project should be evaluated on its own merits in the same manner that any direct investment in real estate should be considered
According to SEC vs. Howey (1946), an investment is a Security to be regulated by the SEC when there is:
  1. an investment of money
  2. in a common enterprise
  3. with the expectation of profits
  4. derived solely for the efforts of others
The management of a TIC can be achieved in one of two ways; either through a master lease or management agreement.  
  • Master Lease Agreement - each TIC is a Master Lessor (landlord) of the property. The Master Lessor then leases the property to a Master Lessee (typically owned by the TIC sponsor); this Master Lessee then subleases the property to the property’s individual tenants. The TIC sponsor (who owns the Master Lessor) will act as a property manager and oversee the property operations; they will collect rents, perform maintenance, lease vacant space, etc. The TICs are then paid a fixed rent based on the master lease; any income above the master lease rent is for the benefit of the Master Lessee (TIC sponsor). This results in a fixed and predictable cash flow stream for the TIC investors while the TIC sponsor enjoys the upside.
  • Management Agreement - signed with the TIC sponsor. The management agreement will give the TIC sponsor the right to manage the property for a fixed period of time usually with some renewal options. The TIC sponsor (who is acting as a property manager) is then paid a management fee. This may be a fixed amount or a % of revenues. The TIC investors typically then receive 100% of the net cash flow (after expenses and debt service). This gives the TIC investors an interest in the upside of the property while the TIC sponsor just receives fee income.

The IRS has ruled that under certain conditions:

  • TICs may structure deals through Delaware Statutory Trusts, which creates a single entity that owns the property
  • Owning part of a trust qualified as owning real property, therefore investors could participate in Section 1031 Exchanges

The IRS has provided 15 guidelines on how TICs should be structured.  However, not all TIC deals follow all IRS guidelines.  Significant guidelines include:

  • Up to 35 investors can participate in one deal
  • Unanimous consent is required between all investors before a property can be sold or refinanced

§1031 Exchange using 
Tenancy-In-Common Interests

The use of Tenancy-In-Common (TIC) interests in 1031 Exchanges became popular after the issuance of IRS Revenue Procedure 2002-22. With a property owned under Tenants-In- Common principles, each TIC owner owns an undivided percentage of the whole property. Under normal circumstances, all TIC owners must exchange their interests to a single buyer since the co-owners are typically treated as a partnership which owns the real estate. However, Rev. Proc. 2002-22 described requirements that can be met for TIC co-owners to structure their relationship in a way that they can obtain an IRS ruling that they are not a Tax Partnership. Highlights of the Procedure include:
  • Legal title must be held in the names of the co-owners of the property, not in the name of a partnership, limited liability company, business trust, or trustees of an irrevocable trust; with an important exception. A Special-Purpose Entity (a single-asset, single-member Limited Liability Company) may be the owner of each separate TIC co-owner.
  • The TIC owner may only engage in "customary activities" involved with owning rental real estate such as rent collection, maintenance, and leasing. This means that a TIC owner may not develop a property.
  • TIC owners must retain the right of partition. However, the procedure allows that a TIC owner may grant a "right of first offer" to other TIC owners in the property, the promoters, and/or the property's lessee
  • 1031 Exchanges may not involve securities, care should be taken when using a Securitized TIC in a 1031 exchange. 

 

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