Tenant in common is a frequently used joint ownership agreement for commercial and residential real estate. Commercial real estate investors often purchase individual interests in TIC properties to complete 1031 exchanges and defer capital gains taxes on the sale of investment properties.
Tenants in common can hold unequal shares, and they also are free to sell those shares independently from other co-owners. Some TIC investors wonder, though, if one party can force a sale of the property regardless of the interests of other owners. This article examines whether one co-owner in a tenants in common agreement can force a sale, as well as an alternative to the TIC agreement that alleviates those concerns entirely.
Tenant in Common Ownership Rights
To answer the question above, a co-owner in a TIC cannot force a sale of the jointly-held property. The only way the property can be sold without litigation is by unanimous agreement among the ownership group -- and since TICs can have up to 35 individual owners, it would be quite the accomplishment to get each owner to agree to sell.
However, a dissenting co-owner in a TIC can still make things quite difficult for the other owners -- and through litigation, he or she actually could force a sale in certain situations.
One of the primary benefits of tenants in common arrangements is ownership interests can be bequeathed to your heirs. While that helps owners protect their estates, it could prove problematic for co-owners if a designated heir wants to liquidate his or her shares. An owner who wants to sell the asset can force a sale of the property through a process called partition by sale. Partition is a legal procedure wherein the asset is given to the court, which performs a forced sale via auction on the courthouse steps. Once the asset is disposed of, co-owners receive proceeds according to their pro-rata shares.
This is an absolute worst-case scenario, however -- it’s unlikely that any such disputes ever reach this stage. Many TIC agreements contain language that precludes the possibility of civil litigation. And in instances where the agreement doesn’t contain such verbiage, co-owners typically go through mediation and arbitration to resolve these types of conflicts.
In arbitration, an impartial negotiator brings together all parties to discuss grievances and goals in the hopes of reaching a settlement that avoids costly litigation. Co-tenants are usually offered the option of buying out the dissenting tenant to bring about a successful resolution.
The key is to fully understand the legal structure of the TIC agreement. Some agreements contain language that precludes co-tenants from partition, although they can sell their shares to other co-tenants or an interested party. If you are considering investing in a TIC to complete a 1031 exchange, be sure to examine the agreement in depth with legal counsel to ensure it meets your investment goals.
TIC or DST -- Which is Better?
There’s another way to complete a 1031 exchange and jointly own commercial real estate, and it completely avoids all of these potential pitfalls mentioned above.
A Delaware Statutory Trust is an investment vehicle that allows investors to purchase fractional interests in institutional-grade commercial assets. DSTs are 1031-exchange eligible both upfront and upon exit, and they can potentially provide recurring monthly income. With a DST, investors own their pro-rata shares of the trust, which in turn owns an asset. Since DSTs are managed by a third party, investors -- the beneficiaries of the trust -- are shielded from property-related issues and risk of dissension among owners.
Both types of ownership structures can provide benefits to commercial real estate investors seeking to defer capital gains from the sale of an investment property. TIC agreements, however, could potentially prove difficult while DSTs are more of a turnkey investment option. Discussing the benefits of both with your accountant and attorney before beginning the 1031 exchange process could help provide you with clear direction on which option best meets your investment goals.
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