TENANCY IN COMMON (TIC’S)
I’M SURE YOU’VE ALREADY HEARD THE NEW BUZZ word, no rx the new trend, the next big wave: Tenancy In Common fondly being referred to as TIC’s. Tenancy In Common is often also referred to as Fractional Ownership or Co-tenancy. This is the type of ownership where each co-owner can choose who will inherit their interest upon death. This differs from “joint tenancy” where upon the death of a co-owner, the interest is passed on to the other co-owners.
I hope to simplify in this article a brief explanation of TIC’s without minimizing that this is a process that requires the expertise of both legal and financial planning,
TIC owners of a multi-unit property have exclusive usage rights to a particular area of the property. They own percentages in an undivided property rather than particular units. The deeds reflect only their ownership percentages. Each owner has the right to use a particular dwelling, which is reflected in a written contract signed by all co-owners. This must not be confused with condominium ownership.
The difference between a condominium and a tenancy in common is that the condominium property has been legally divided into units which can be individually owned. A condo owner owns a specific area of the property, which is designated on a recorded map with a deed that designates the unit that is owned. A TIC owner only owns a percentage in a property that is undivided not a specific unit with a deed, which only shows ownership percentages. The TIC owner has a written contract referred to as a Tenancy In Common Agreement signed by all co-owners allowing the right to use a specific unit. A TIC Owner may sell their common interest at any time.
The ability to receive “Fractional Loans,” which enables co-owners to obtain individual loans significantly reduces the risk of co-ownership. Fractional Loans enable each co-owner to have an individual loan. The loan is secured by the co-owners share of percentage in the property so if one co-owner should default it does not impact the other co-owners. Seller financing is another vehicle where the TIC loan is carried back by the former owner,
which may even be in conjunction with an underlying loan that predated the formation of the tenancy in common.
The approval by the DRE (California Department of Real Estate) is required for five or more units. So don’t be surprised if you see lots of TIC sales for building with fewer than 5 units. The ORE process to obtain the “White Slip” (The Public Report) usually takes around 9- ] 2 months to complete. The Public Report details disclosures and information about the property and must be given to all prospective buyers.
A TIC property will have a single assessed value since the property is not legally divided. There will be one tax bill not separate bills for each co-owner. The property tax allocation among owners will be the amount each co-owner paid for their interest. The increase
in property taxes due to a resale should be paid entirely by the
new buyer. The resale by one co-owner should not increase the property tax burden of a non-selling co-owner.
Expenses for the property are divided into group expenses and individual expenses. Typical group expenses include building insurance, property taxes, improvements and maintenance to common areas and shared utilities. Group expenses are paid using a monthly assessment through a group bank account with each owner making a monthly payment to the group account. Monthly payments are equated to the owner’s share of the group’s expenses. Individual expenses are paid by the Individual owners for improvements to interior units, maintenance, separate utilities and personal property insurance. This is similar to condominium projects where common area expenses are shared amongst owners and individual owners incur their own expenses for their individual units.
For 1031 exchange purposes, each individual TIC transaction can be treated as a separate transaction or several TIC sales can be combined. As always, it is very important to consult your tax advisor for the specifics of your particular tax basis before making any assumptions.
TIC ownership is comparable to condominium ownership creating similar risks associated with shared responsibilities for common area maintenance, management, insurance and the usual differences of opinions amongst owners. TIC’s have additional risks related to shared obligations for property taxes, reliance on unrecorded co-ownership agreements and can be much more complex on re-sales and refinancing.
TIC buyers are not necessarily first time buyers. TIC’s are attractive because they are affordable. Despite all the headlines that prices are falling, property is still very expensive. An owner interested in utilizing a TIC sales approach needs to really know the targeted buyer. Buyers must be educated in the process of what they are buying, which requires an educated sales team. A few tenders are now also entering this arena of “Fractional Loan” financing. Again, educated lenders who understand this specific type of financing and associated risk.
Needless to say, TIC’s are very attractive. This is an obvious ve¬hicle to maximize the value of an apartment building by selling individual percentages of ownership as oppose to a single sale. Having this vehicle in place not only adds value by having the ability to sell percentages but also creates further demand for rentals as the supply of rentals diminishes as a result of more sales of individual units.
Keep in mind that even though the process of doing a TIC for under 5 units or less may not currently require a White Slip; there is concern that even though it is more complex, costly and time consuming to obtain the DRE Approval that it may be prudent In the long run to have the public report in place.
Oh yes, speaking of concern; what about the City of Santa Monica? Can anyone guess what their concerns may be? Do you think they will be favorable of TIC’s? Do you trust them? Those are loaded questions and as you know we have a lot of history with our city. Please, please be responsible, use caution and get the right information from the right sources. WAM
