A Tenant in Common arrangement, also known as Tenants-in-Common, or TIC, involves a shared ownership of a property. In this type of arrangement, each owner owns a specific “piece” of the asset; and many times, those pieces, or shares, can be of unequal sizes. This is also known as fractional ownership, and it can help investors to better diversify their portfolios, or to have access to higher quality assets.
If you are a TIC member, you own a percentage of a particular property, whether it be multifamily or office. As such, if you’re wondering whether a tenant in common can rent or lease their share of property, the answer is no.
Beneficial Ownership versus Physical Possession
One of the reasons why you can’t rent or lease your share of a TIC-owned property is because of the type of ownership. As a TIC member, you own a beneficial interest in the property, with this concept defined as the right to receive a benefit from an asset that is held by another entity or party.
While you might receive a monthly income from the apartment building owned by your TIC, you don’t own that building outright, as a physical possession. Rather, you own a portion of the entity (the TIC), which, in turn, owns that underlying property. You, in turn, own a fraction of that entity, and only a portion of it, at that.
What this means is that any income derived from the property is paid out, based on each owner’s interest. If you own 25% of that above-mentioned apartment building, you could receive 25% of the cash flow from it. You cannot, however, lease out your 25% share, and receive 100% of the income from it.
Group Approval
The other reason why you wouldn’t be able to lease out your 25% share of the property in a TIC arrangement is that every decision made pertaining to that property has to be unanimous. In other words, the co-owners in your TIC need to put their stamp of approval on it. So, if you promised your brother’s cousin's friend that he could rent part of your property, you might have to renege on that promise, unless the other TIC members agree to it.
And it isn’t just leasing activities that require the undisputed okay of your group. TIC co-owners must agree on just about everything, including the following.
- Hiring a property manager
- Property sale or disposition
- Creation or modification of a blanket lien
- Brokerage agreements
In short, anything that has to do with managing, upgrading, leasing, or selling the property requires the approval of all owners involved in the TIC. Everyone in the TIC has the same voting rights, even though the shares they might own are unequal. Because of this aspect of TICs, it’s important to understand exactly what a fractional benefit might entitle you to, and what you will likely have to avoid as a TIC co-owner.
Benefits of Beneficial Ownership
While you could enjoy certain advantages from a fractional ownership arrangement, leasing out your particular share is not one of them, due to the very nature of how a TIC is structured. If you’re interested in owning in order to rent space directly to a tenant, then a TIC is likely not the investment you want to consider.
Even if you’re enthusiastic about the idea of participating in a TIC arrangement, be sure that all terms and conditions of ownership are spelled out and agreed to before signing that contract.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
