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How to Create a Tenancy in Common Agreement

Published on: June 23, 2024

Creating a Tenancy in Common (TIC) agreement can be a strategic move for investors looking to pool resources while maintaining individual ownership interests in a property. At 1031 Exchange Place, we understand the intricacies of real estate investments and are here to guide you through the process. This article will walk you through the steps of creating a TIC agreement, highlighting key considerations to ensure a smooth and successful arrangement.

Understanding Tenancy in Common (TIC)

Definition and Structure

A Tenancy in Common (TIC) is a form of co-ownership where two or more individuals hold undivided interests in a property. Each co-owner, known as a tenant in common, owns a specific percentage of the property, which may be equal or unequal. The crucial aspect of a TIC arrangement is that each tenant in common has the right to use and enjoy the entire property, irrespective of their ownership share.

Legal Framework

The legal framework governing TIC agreements varies by jurisdiction, but several common principles apply. Tenants in common hold their interests separately and can independently transfer or sell their share without the need for consent from other co-owners. This flexibility distinguishes TIC from joint tenancy, where co-owners have equal shares and must obtain consent from others to transfer their interest.

Rights and Responsibilities

In a TIC arrangement, each co-owner has the right to possess and use the entire property. However, they also share the responsibilities associated with property ownership, such as maintenance, taxes, and insurance. It is crucial to have a clear agreement outlining these responsibilities to prevent conflicts and ensure smooth operation.

Succession Planning

One significant advantage of a TIC is the ability to include succession planning within the agreement. Tenants in common can designate heirs to inherit their share of the property, ensuring that their investment is protected and can be passed on to future generations. This feature provides a level of control and flexibility that is not available in other forms of co-ownership.

Benefits of a Tenancy in Common Agreement

Flexibility in Ownership

  • Customizable Investment Levels: One of the primary advantages of a TIC agreement is the flexibility it offers in terms of ownership. Investors can determine their level of investment based on their financial capabilities, allowing for tailored participation in the property. This means that each co-owner can invest according to their budget and desired level of involvement, making TIC a versatile option for various investors.
  • Individual Ownership Rights: Each tenant in common holds a distinct, divisible ownership interest in the property. This allows co-owners to make independent decisions regarding their share, including selling, gifting, or bequeathing their interest without needing approval from the other co-owners. This individual ownership right provides significant autonomy and control over one’s investment.

Ease of Transfer

  • Simplified Transfer Process: TIC interests can be sold, gifted, or bequeathed without disrupting the ownership of the other parties. This makes it an attractive option for those who may want to change their investment portfolio over time. The ability to transfer ownership interests without affecting the entire property structure simplifies the process and reduces potential legal complications.
  • Attractiveness to Potential Buyers: The ease of transferring TIC interests can make the property more attractive to potential buyers. Since investors can buy into a property without requiring the consent of all co-owners, it broadens the market for selling shares. This can enhance liquidity and provide an exit strategy for investors looking to divest their interests.

Potential for Increased Investment Opportunities

  • Pooling Resources: By pooling resources, TIC agreements can enable investors to access properties they might not be able to afford individually. This collective buying power can open doors to more lucrative investment opportunities, allowing investors to participate in larger, more valuable properties that offer better returns.
  • Diversification: TIC arrangements also allow for diversification of investment portfolios. By investing in multiple TIC properties, investors can spread their risk across different assets and locations. This diversification can enhance the stability and potential profitability of their investment portfolio.

Shared Responsibilities and Costs

  • Shared Maintenance and Management: In a TIC arrangement, the responsibilities and costs associated with property maintenance and management are shared among the co-owners. This can significantly reduce the burden on individual investors, making it easier to manage the property effectively. Shared responsibilities can lead to better property upkeep and improved value over time.
  • Economies of Scale: Pooling resources in a TIC agreement can also lead to economies of scale. Shared expenses for maintenance, property management, and other operational costs can lower the overall expense for each co-owner. This cost-sharing benefit can enhance the property’s profitability and make it a more attractive investment.

Steps to Create a Tenancy in Common Agreement

Step 1: Assemble Your Investment Group

Identify Potential Co-Owners

Begin by identifying and gathering a group of like-minded investors who share similar investment goals. This could include friends, family, or professional acquaintances with a common interest in real estate investment. Ensure that all potential co-owners have a clear understanding of what a TIC agreement entails and are committed to the long-term goals of the investment.

Align Investment Objectives

It’s crucial to ensure that all parties are on the same page regarding the investment strategy, risk tolerance, and expected returns. Hold discussions to align on key objectives and outline the roles and responsibilities of each investor. This alignment helps in building a cohesive investment group that can work together effectively.

Step 2: Choose the Property

Conduct Property Research

Select a property that meets the investment criteria of your group. Conduct thorough due diligence, including property inspections, market analysis, and financial projections, to ensure that the investment is sound. Evaluate potential properties based on location, market trends, expected appreciation, and rental income potential.

Assess Financial Viability

Assess the financial viability of the property by analyzing cash flow projections, expected return on investment (ROI), and any potential risks. Ensure that the property aligns with the group’s investment goals and financial capabilities.

Step 3: Define Ownership Interests

Determine Ownership Percentages

Determine the percentage of ownership each investor will hold. This can be based on the amount of capital each party contributes. It’s important to clearly document these percentages in the TIC agreement to avoid future disputes. Ownership interests should reflect the level of investment and responsibility each co-owner is taking on.

Document Contributions

Document the contributions of each investor, including initial capital, any future financial commitments, and other resources provided. This documentation is essential for transparency and accountability within the investment group.

Step 4: Draft the Tenancy in Common Agreement

Engage a Qualified Attorney

Engage a qualified real estate attorney to draft the TIC agreement. This document should outline the rights and responsibilities of each co-owner, including:

  • Ownership Interests: Clearly state the percentage of ownership for each party.
  • Usage Rights: Define how the property will be used and accessed by each owner.
  • Maintenance and Expenses: Establish how property maintenance and expenses will be shared among the owners.
  • Dispute Resolution: Include mechanisms for resolving disputes that may arise between co-owners.
  • Exit Strategy: Detail the process for selling or transferring ownership interests, including any rights of first refusal for the remaining co-owners.

Customize the Agreement

Customize the TIC agreement to address the specific needs and preferences of the investment group. Include provisions for decision-making processes, voting rights, and any other considerations relevant to the property and the co-owners.

Step 5: Secure Financing (if necessary)

Explore Financing Options

If financing is required, secure a loan that accommodates a TIC structure. Some lenders specialize in TIC financing, so it’s advisable to work with those who are familiar with this type of arrangement. Compare loan options, interest rates, and terms to find the most suitable financing solution for your investment group.

Coordinate with Lenders

Coordinate with lenders to ensure that the loan terms align with the TIC agreement and the ownership structure. Ensure that all co-owners understand their financial obligations and responsibilities under the loan agreement.

Step 6: Close the Transaction

Finalize Legal Documents

Once the TIC agreement is in place and financing is secured, proceed with the property purchase. Ensure that all legal documents are signed, and the ownership interests are properly recorded. Work with your attorney to complete the closing process, ensuring all legal and financial requirements are met.

Record Ownership

Record the ownership interests with the appropriate local government or registry to ensure that the TIC arrangement is legally recognized. Proper recording of ownership is essential for protecting the rights of each co-owner.

Step 7: Manage the Property

Establish a Management Plan

Establish a system for managing the property, including collecting rent, handling maintenance, and paying expenses. Clear communication and defined roles are key to successful property management in a TIC arrangement. Create a management plan that outlines the responsibilities of each co-owner and any hired property managers.

Monitor Performance

Regularly monitor the performance of the property, including financial performance, occupancy rates, and maintenance needs. Hold periodic meetings with co-owners to review the property’s performance and make any necessary adjustments to the management plan.

We Have Tenant in Common Investment Opportunities

At 1031 Exchange Place, we are dedicated to helping investors maximize their potential through strategic 1031 exchange services and Tenant in Common (TIC) investment opportunities. Our expert team guides you through every step, ensuring that your investments are tailored to your financial goals and compliant with all regulatory requirements.

Are you ready to take advantage of tax deferral benefits while diversifying your real estate portfolio? Our 1031 exchange services allow you to reinvest proceeds from the sale of a property into new, lucrative investment opportunities without the immediate tax burden. This powerful tool can significantly enhance your financial growth and stability.

Explore the advantages of TIC arrangements with our comprehensive support. By pooling resources, you can access high-value properties and enjoy shared responsibilities and costs. Our specialized knowledge in TIC investments ensures that you benefit from a structured, legally sound agreement that aligns with your investment strategy.

Don’t miss out on the chance to elevate your investment game. Contact 1031 Exchange Place today to learn how our 1031 exchange services and TIC investment opportunities can transform your real estate portfolio. Call us now to schedule a consultation with one of our experienced professionals. Your path to smarter investing starts here.

Nate-Leavitt-web

Authored By:

1031 Investment Advisor

Nate oversees the daily operations, business development, and strategy for 1031 Exchange Place. He became interested in real estate from a young age due to his father's influence. After earning his real estate license at 18, Nate worked in the 1031 industry, focusing on business development through a unique white-labeling model. Following a religious mission in Taiwan, he continued in the industry until the 2008/2009 real estate crash. During the downturn, Nate pursued entrepreneurship and marketing, working with startups and outdoor companies. As the 1031 market recovered, he returned to work with his father, aiming to provide a more personalized experience for clients. Nate is passionate about outdoor activities and spends his free time with his wife and four sons, enjoying fly fishing, skiing, backpacking, rock climbing, and riding dirt bikes.