Tenancy in Common (TIC) arrangements include multiple situations. The configuration can range from two unrelated individuals buying a home to share and live in all the way to 35 people collaborating in the ownership of a significant asset. In any case, the owners each hold title to an undivided, fractional share, and their portions don’t have to be equal. The TIC agreement details the ownership percentages.
Sometimes, small groups of investors interested in working together choose to use a TIC. First, it's helpful to know that TIC structures don't include rights of survivorship. For example, if you buy a vacation property with a friend and your friend passes away, you do not inherit their share unless they bequeath it to you. This status is different from a joint tenancy, in which the joint tenants inherit the allocation of an owner who passes. Also, each owner can sell or otherwise dispose of their share independently. However, the unanimous agreement of the owners is required to sell the entire property or to make other significant decisions.
TIC investments can also be more sophisticated.
Tenancy in Common investments aren't limited to small groups, in any case. The maximum number of investors is 35, and sponsors often make offerings through a private placement memorandum (PPM). Investors who review the PPM and decide to invest receive the subscription letter and the TIC agreement. The TIC agreement is not part of the private placement memorandum but should be provided to investors who commit to the investment.
What is in the TIC agreement?
Like the arrangements they codify, TIC agreements vary in detail and function. The elements for a small group with one property may be less complex than the ones needed for a more extensive operation. However, each TIC agreement should include at least the following:
- Distribution of ownership
- Property usage
- Share of expenses and income
- Management arrangements
- Procedure for termination of the agreement
Because every TIC is unique, there is no universal form for participants. Also, each state may have specific requirements for the investors to consider. The agreement should reflect the group's intentions and make contingency plans for responding to potential future conflicts. While TIC investments offer great opportunities for many investors, there are potential issues that even a tight agreement can’t avoid.
For example, all owners must agree on major management decisions. That can be challenging in some cases, particularly if ownership has transferred from original members to heirs. If an owner stops paying their share of expenses, the other owners would need to absorb the costs until they find a solution. If one owner refuses to support significant repairs, the others could end up paying more than their pro-rata share. Finally, if a participant refuses the majority decision to sell, the group could end up in a legal battle.
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.
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.
Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.
