Refinancing can be a necessary strategy for investment property owners entering into a Tenancy-in-Common (TIC) agreement. However, due to the setup of a TIC, refinancing can be highly complex and require multiple steps. Understanding what’s involved in the process can help determine if refinancing the property is feasible.
A TIC Definition
A Tenancy-in-Common is a legal arrangement in which you and at least one other individual jointly own a property. Each individual involved owns an equal or unequal fractional share in the property. The setup means you can do what you want with your share–pass it on to heirs, borrow against it, or sell it. However, some TIC agreements include restrictions, such as a right of first refusal for co-owners. Additionally, borrowing against a TIC interest may be challenging, as lenders often require all co-owners to approve financing arrangements.
Refinancing Options
The following options are available for refinancing a TIC-owned property:
- Group refinance: TIC owners agree to “go in” on a single refinance, which would replace the existing mortgage or mortgages. With this method, obtaining stronger loan terms and lower interest rates is possible. However, it also requires that all co-owners agree to participate.
- Fractional loans: If not everyone in your TIC is a fan of refinancing, you could obtain a fractional loan for your particular share. This allows you to refinance your holding without the approval of the other co-owners. However, fractional loans often have higher interest rates and are primarily available only through specialty lenders.
- Switching the legal structure: If you and your partners agree, changing your TIC to a limited liability company (LLC) structure could ease the way to a refi loan. Such a move could simplify the loan process, as lenders tend to be more comfortable with LLCs than TICs. The move could also generate unforeseen tax consequences and legal changes.
Challenges of a TIC Property Refi
In addition to considering the best type of loan available for a TIC, you should also be aware of additional refinancing issues:
Lender reluctance. Many lenders are wary of refinancing TIC properties due to complicated ownership and legal entitlements.
Co-owners’ refusal. Not all TIC co-owners might favor refinancing, which could delay or stop the process.
Owner creditworthiness. Refinancing requires credit checks on everyone who owns the property. A poor credit score or dubious financial health of any owner could result in the refusal of the refi application.
Agreement structure. In addition to the other challenges listed above, the TIC agreement you signed might not allow a refinance option. It’s possible to change the agreement, but requires approval from all involved co-owners.
Preparing Before Doing
Refinancing a TIC property can be complex. But it’s not impossible. Getting the TIC owners on the same page and researching to find willing lenders can help the process. Also helpful is bringing expert assistance on board. Knowledgeable tax professionals and attorneys can help guide you and the other TIC co-owners through the refinancing process.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
