What is a Tenancy in Common in Commercial Real Estate?
Tenancy in common (TIC) is a type of commercial real estate ownership structure in which more than one party owns a specific property. Tenancy in common can make it easier for commercial real estate borrowers to get financing for a property, but can cause a variety of legal and practical complications if property owners are not careful.
Joint Tenancies vs. Tenancies in Common
Many properties that are owned by one or more individuals are actually joint tenancies. If a property is held in joint tenancy, however, it must conform to a specific set of standards, often referred to as TTIP. This means that each joint tenant needs to begin ownership of the property simultaneously, which must be documented on the same deed, and each joint tenant must receive the same ownership share in the property, with equal associated possession rights. In most cases, a joint tenancy will automatically become a TIC if one joint tenant sells their ownership rights to another party.
Unlike joint tenancy, tenants in common can each own different percentage shares of a commercial property. For instance, one investor may own 20% of a commercial property, while another investor owns the remaining 80%. In contrast, joint tenants all must have an equal stake. In addition, while joint tenants must all take possession of a property at the same time, new tenants in common may be added at any time. Finally, in a tenancy in common, if a tenant in common dies, their share of a property will not revert to the other owners, as it would in a joint tenancy. Instead, it will typically be passed on to a designated heir. If no heir is chosen, their share in the property will generally go to probate, which can cause significant financial uncertainty for the other tenants.
Tenancies in Common in Relation to Commercial Real Estate Loans
Tenancies in common are often ideal for commercial large real estate projects, as multiple borrowers typically have a higher combined net worth than a single individual, and can therefore qualify for a larger amount of financing. However, commercial real estate lenders generally require each tenant in common that owns a share of a property sign a commercial mortgage agreement. Otherwise, only the TICs that signed would be liable to repay the loan, and a lender could not effectively take ownership of the property if the tenants in common defaulted on their debt.
A tenant in common does not have to be an individual person. In fact, for many types of commercial financing, it must be a corporation, LLC, or limited partnership (LP), which itself may need to be legally classified as a special purpose entity (SPE). For instance, certain types of Fannie Mae® and Freddie Mac® multifamily loans permit borrowers to be tenancies in common, but each tenant must be an SPE. This helps limit liability for both borrowers and the lender.
Tax Considerations and Dissolving a Tenancy in Common
Tenancies in common generally receive one tax bill, which is usually subdivided based on the amount of the property each tenant owns. However, this is up to the tenants in common to decide amongst themselves, and is typically specified in the tenancy in common agreement. Depending on state and local laws, each tenant in common may have joint and several liability for their entire property’s tax bill, regardless of their ownership share. So, for example, if two out of three tenants in common go bankrupt and refuse to pay their share of property taxes, a third, solvent tenant could be forced to foot the entire bill.
Tenancies in common can be dissolved if one tenant in common buys out the other tenants’ ownership shares. It can also be dissolved by the sale of the property. If one tenant wishes to sell, but the others do not, they can file a partition action in court demanding the sale of the property.