Tenancy In Common is a way for two or more persons to have an undivided fractional ownership interest in a single property. With this type of real property ownership, each owner has individual rights and obligations related to the property. These rights equal the balanced share of the owner’s interest.
Having this type of ownership interest gives an investor the right to his or her proportionate share of net income, tax benefits and appreciation. The owner is treated in the same way to a fee simple owner and receives an individual property deed and title insurance for his or her share of the property. An owner may also bequeath his or her interest to any beneficiary upon the owner’s death.
This type of direct interest in real estate also qualifies as “like-kind” real estate for 1031 exchanges, making TICs an important part of the 1031 exchange universe. To protect themselves from personal liability arising from holding direct title to property, most investors set up Limited Liability Companies (LLCs) for this purpose.
One of the key advantages is that each individual investor maintains the capability to have a say in the day-to-day operation of the property. This rights includes deciding when and under what terms to eventually sell the investment. This is in contrast to Delaware Statutory Trust ownership where individual investors yield this authority to a third-party.
Also, since buyers are able to pool resources, this gives the collective much more buying power than an individual investor may have. This opens up a wider variety of prospective investment properties, with greater growth potential.
Finally, in cases where a Tenancy In Common is offered as a security, the investor also get pleasure from the benefits of securitized real estate.
Although very trendy, this type of ownership also presents a unique set of challenges that any investor should thoroughly consider ahead of time. Beyond the typical risks related with investing in real estate, when ownership involves multiple investors there is always the risk of conflict among the owner pool.
Any major decision requires the undisputed approval of all owners, which can be problematic if fast decisions are required. While most agreements include a buy-out provision for dissenting owners, it is typically not a fast or easy process. The time it takes to resolve disagreements among owners can frequently cause the collective to miss out on lucrative selling opportunities.
Similarly, if the property is mortgaged, there is also the risk that a change in an individual owner’s financial status may harmfully impact any future refinancing. Unlike Delaware Statutory Trusts, when a Tenancy In Common seeks financing, the lender will scrutinize the individual credit of each individual investor.
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