There’s a growing trend of multiple buyers sharing ownership of a single property in a legal arrangement known as tenancy in common (TIC). And this has wide-reaching implications for homebuyers, as well as developers and investors.
In this article, we explore the details of TIC:
- What TIC is,
- How TIC works,
- The pros and cons of TIC for buyers,
- The pros and cons of TIC for developers and investors, and
- How to invest in a TIC development.
What is Tenancy in Common?
Tenancy in common (TIC) is a form of real estate ownership in which multiple parties share legal rights to a single property. The ownership interest of each party is “undivided,” meaning that the co-owners all own a percentage of the property, but the percentage doesn’t directly translate into specific portions of the property.
How Tenancy in Common Works
With tenancy in common, there is a single title for the entire property, and each tenant in common is listed on this title, along with their ownership share. Unlike other forms of real estate ownership, TIC does not require all co-owners to have an equal share. A two-party TIC could have one party own 60% for example, while the other party owns the remaining 40%.
TIC ownership is a fairly common option for unmarried partners who wish to purchase a home together. This structure can also work well for family members or business partners who wish to own property together.
There is also a growing trend of groups using TIC to purchase a multi-family property, in which each co-owner will reside in one of the units. In high-value markets like San Francisco, Los Angeles, and New York, where even condo ownership has become too expensive for many would-be buyers, TIC arrangements can make homeownership more affordable. In this case, the co-owners could be existing friend groups where everyone knows everyone else, or they could be strangers, brought together by the prospect of accessible homeownership.
While the title for a TIC property shows that all co-owners have an undivided interest in the property, a TIC Agreement can be drafted to convey separate areas of occupancy. For example, if four buyers purchase a four-unit TIC property together, the TIC Agreement can assign one buyer to each unit, with common areas shared equally.
In some ways, TIC ownership gives individual freedoms to the co-owners. Each co-owner can, for example, sell, will away, or borrow against their portion of ownership.
However, a TIC agreement typically imposes “joint-and-several liability” on the co-owners. This means that each independent owner may be liable for the full amount of any debt or expenses associated with the property. If one of the co-owners refuses to pay their portion of the property tax bill, for example, all owners can be held financially responsible for that missing amount. TIC requires the trust and cooperation of all co-owners.
Tenancy in Common vs. Condos
A TIC property is different from a condominium property. Condos represent divided interest, allowing buyers to purchase their specific unit within the development. TIC represents an undivided interest in which owners might agree to occupy certain spaces of the property, but they technically all own a share of the entire property.
Tenancy in Common vs. Joint Tenancy
TIC and joint tenancy are very similar ownership models. In both cases, multiple owners share ownership of an undivided interest in the property. The difference between TIC and joint tenancy lies in the equality of ownership and the right of survivorship.
TIC ownership does not need to be divided equally between the co-owners; different owners can own different percentages of the property. With joint tenancy, all owners must hold an equal share of the property.
With TIC, if one owner dies, their share goes to their estate, to be inherited by beneficiaries or heirs. But with joint tenancy, if one owner dies, their share is absorbed by the remaining owner(s).
Tenancy in Common vs. Tenancy by the Entirety
Some states allow co-owners to hold title in a structure called “tenancy by the entirety (TBE).” With TBE, each party has a 100% interest in the property (as if each were a full owner). This option is mostly reserved for couples (married or not), who are purchasing a home together. If the co-owners are married, the property is viewed as being owned by one entity.
This is different from TIC, in which ownership percentages are set for each co-owner.
The Pros and Cons of TIC for Buyers
There are both upsides and potential downsides for buyers to consider before purchasing interest in a TIC property.
The Benefits of Buying with a TIC Ownership Structure
The potential advantages of buying a TIC property include:
- More affordable access to property ownership in high-value markets. TIC interest is typically more affordable than condo units.
- Different owners can hold different ownership percentages. If one party invests more than the other(s), that party can hold a higher ownership percentage.
- Co-owners have a level of control over their interests. Each individual owner is free to sell their interest, will away their interest, or borrow against it.
The Potential Drawbacks of Buying with a TIC Ownership Structure
Before purchasing a stake in a TIC, consider these potential disadvantages.
- All co-owners are equally liable for debt and taxes. If one party fails to pay their portion of the mortgage or property taxes, all owners are held equally responsible for that amount.
- One party can potentially force the sale or division of the property. If there is a serious dispute, one of the co-owners can petition the courts to require that the property be divided into separately owned areas or even sold off.
- No automatic survivorship rights. This may be a disadvantage for buyers who want their share to be passed along to the remaining owner(s) without requiring that this be specified in a will and testament.
The Pros and Cons of TIC for Developers and Real Estate Investors
As with any real estate investing strategy, there are pros and cons to consider before investing in TIC developments.
The Benefits of Investing in TIC Developments
TIC developments provide many of the same advantages as traditional multi-family developments, including:
- Forced appreciation. As opportunistic real estate investments, ground-up developments are typically worth more than the sum of their parts. The value of a completed development likely exceeds the purchase price of the lot plus the cost of construction.
- Tax breaks. There are several tax benefits of real estate investing. For example, proceeds from the sale may be taxed at the lower long-term capital gains tax rate, rather than the higher earned income rate.
- Lower expenses per unit. Developing a multi-family building costs less per unit than building single-family homes.
Additionally, there are several advantages that pertain specifically to TIC developments, built to sell, including:
- High demand in expensive markets. Markets like Los Angeles have a high demand for TIC properties, but a very low supply.
- A deeper buyer pool. Because TIC ownership is more affordable for homebuyers than single-family homes or condos, TIC developments appeal to a wide range of buyers who are unable or unwilling to pay the higher prices for individual ownership.
- Higher sales prices. Compared to selling a multi-family structure to a single investor-buyer, selling TIC interest can command sales prices of 10-20% more.
- Contributing to affordable housing inventory. Socially responsible investors appreciate that TIC developments add affordable units, making homeownership more accessible for lower-income buyers.
The Potential Drawbacks of Investing in TIC Developments
In addition to the many benefits of investing in TIC developments, there are a few potential downsides to consider, including:
- High upfront expenses. Developing a multi-family structure in an expensive market requires heavy capital outlays. Individual investors may struggle to finance a project of this scale alone.
- Coordination of multiple buyers. Rather than selling to one buyer, TIC developers need to find multiple buyers and help with arrangements for the shared ownership structure.
How to Easily Invest in TIC Development
If you are looking to invest in TIC development, but the potential downsides are giving you pause, consider investing in a crowdfunded TIC project.
Crowdfunding pools funds from multiple investors, allowing you to participate in a deal for substantially less than it would cost to finance a similar project independently. Additionally, it shifts the responsibility of overseeing construction and managing buyers to the project's sponsor, removing the hassle from TIC investing.
Take Gatsby Investment's innovative TIC development model for example. This unique investment opportunity enables you to capitalize on the benefits of a TIC development while mitigating the common downsides associated with this type of investment.
Investing in a TIC development doesn’t have to be cost-prohibitive, time-consuming, or difficult. By teaming up with Gatsby Investment, you can leverage the knowledge and experience of industry experts and earn completely passive returns on your investment!