TIC Financing - TIC - Tenant-in-Common

How do individual tenancy in common loans ("fractional loans") work?

Individual tenant in common finance implements separate financing for each owner. Each loan engages a note signed only by each owner of a particular tenant in common fractional ownership. These are secured by a deed of trust covering only the owner's fractional TIC share. If an owner defaults on his/her loan, the bank or lender can foreclose on that owner's share only. The share that has been foreclosed upon is then sold, the buyer acquires the defaulting owner's share. None of the other tenancy in common owners will be affected by the non-payment or foreclosure.

Tenant in common financing is a concept that has existed for many years. Private lenders have used individual notes and trust deeds for more than 20 years. Also, developers of fractional vacation home projects have offered individual bank financing. Whenever title is held by multiple owners but only one of those owners signs the mortgage, Individual tenancy in common financing is created automatically. This is a situation which has occurred frequently enough to create a legislation related to default on TIC interests.

Tenancy in common "wraparound" financing… What is it?

In "wraparound" or "all-inclusive" tenancy in common financing, there is one or more underlying loan(s) that predate the tenancy in common formation, for which the prior owner/seller retains responsibility. Each Tenant In Common buyer acquires their own loan. The T.I.C. owners pay the seller. The seller then pays the bank, which holds the outstanding mortgage or mortgages. This type of structure has several advantages. The advantage for the buyers is that it eliminates the risk that a buyer may default on their mortgage and affect the credit of the other owners, or even worse, cause another owner to lose their property. In the case of the seller, risk is reduced as well. Using individual seller-wrapped financing does not bypass due-on-sale requirements in the assigned loan, so the seller must get permission for the sale from the original lender. Each individual TIC loan should be assumable by a qualified buyer.

Property Tax allocation within a tenancy in common?

Property owned as a tenancy in common is not legally divided, it has one assessed value and the co-owner group will receive one property tax bill (Fractional share owners will not receive separate bills). The starting point for allocating the property tax between all of the owners should be the amount that each co-owner paid for their fractional share. A resale by one co-owner should never increase a non-selling co-owner's property tax burden. Similarly, when the owner of an entire property sells some tenancy in common shares but retains an ownership interest, their property tax share will be based on the prior to sale assessed value. When the property tax increases, because of some non-sale-related activity by an owner (example: an improvement), the entire increase will be paid by the co-owner who causes the increase. When property tax increases because of an increase in the applicable tax rate, or a reassessment not related to the activity of a specific co-owner, the increase will be assigned according to the percentages devised from the previous purchase prices.

How are the expenses paid in a T.I.C.?

Building expenses will be divided into "individual costs" and "group costs". Individual costs include but are not limited to: maintenance and improvements to property interiors, personal property insurance, and separately metered utilities; they are paid directly by the individual owners. Group costs include mortgage payments (in the case of a group loan), building insurance, property tax, maintenance and improvements to common areas, and shared utilities such as water and rubbish removal; these are paid from a group bank account using a monthly assessment blotter. Through this system, each individual owner makes a single monthly payment to the group account. The monthly payment is based on the total of the owner's share of each of the expected group costs.

How are the decisions made in a tenancy in common?

All decisions are made by owner vote. Usually, a distinction is made between day-to-day decisions made by a majority, and major costs, such as high cost non-emergency repairs or changes in the allocation of usage rights or costs, made by unanimous vote.

In larger tenant in common groups, it is not practical to hold an owner meeting each and every time a decision is necessary, so day to day operational matters are handled by elected boards or management committees. Major decisions require a majority, or unanimous vote by all owners, depending on the importance of the issue.

How are T.I.C.’s managed?

It is imperative for the success of a T.I.C. that responsibility for each aspect of management be assigned to one person. In this context, informality generally translates into inaction, and dispute. In each and every case it is always advisable to have a formal management structure built into the co-ownership agreement, even if you plan on ignoring it and handling issues informally. That way, if things do not go as everyone has planned, or the informal approach has failed, the more formal structure is available as a "safety net" arrangement.

How does a T.I.C. start?

Most often, a T.I.C. starts when a property seller or their real estate broker makes an elective decision to sell the property as T.I.C. shares. This type of formation works best when the seller develops the T.I.C. structure and the T.I.C. agreement before selling (this is discussed below), and each buyer has the opportunity to look over and approve the structure and the agreement before entering into a formal agreement.

Other cases exist where a buyer creates the T.I.C. structure and the T.I.C. agreement. Example: a buyer will assemble a group of friends or colleagues and use a licensed real estate agent to find a building, agree on the division of fractional ownership percentages and units. At that point they will work with an attorney or Qualified Intermediary, with tenancy in common experience, to create the tenancy in common agreement.

Why would an owner or real estate agent choose T.I.C. marketing approach?

Owners of apartment buildings and lots with multiple houses have increasingly turned to T.I.C.’s as a way of maximizing the value of their investments. Marketing as a tenancy in common often results in the quickest sale and the highest price because (i) sale prices have increased much more quickly than rents in many communities, and (ii) there are far more home buyers than investors in the marketplace. T.I.C.’s also offer the flexibility of selling less than the whole property. This allows the owner to gradually replace tenants with T.I.C. owners as units become vacant and to diversify their real estate portfolio, while still maintaining an interest in the building.

Why would an owner or real estate agent selling an entire property building obtain a T.I.C. agreement? Why not let the buyers get their own T.I.C. Agreement?

Although it is, in theory, possible to gather an entire buyer group, have them prepare a single offer as a group, then allow them the time and flexibility to create their own tenancy in common agreement prior to close (while the property is held off the market), this approach fails much more often than it succeeds and consumes a huge amount of effort and time even when successful. Most sellers and Realtors find it much easier and more productive to accept individual offers from prospective buyers of each fractional share even when they intend to simultaneously close the sales to all the buyers at once. (Note that closing the sales one at a time is also possible, as discussed below.)

Accepting individual offers on the tenancy in common shares is virtually impossible without having a tenancy in common agreement in place. Since the property has not been subdivided, the owner cannot legally accept offers on particular units or houses. Each individual purchase contract needs to describe what is being purchased as a percentage of the entire property. The structure created by the TIC agreement is necessary to avoid the uncertainty and risk that would otherwise be associated with a series of purchase contracts for percentages of the building. The need for a pre-marketing TIC agreement is the same regardless of whether the owner plans to allow individual TIC sales to close separately or insists that the entire property be sold at once.

Is it possible to sell T.I.C. shares one at a time?

The practice of selling tenancy in common shares one at a time is not only possible, it has become very common in recent years, and is used both by sellers who are interested in selling an entire property as quickly as possible, and by sellers who only wish to sell shares as rental tenants vacate. For the former, this approach eliminates the risk that Buyer #1 will be lost before Buyer #4 is ready to close. For the latter, this approach allows an owner to get the maximum sale price for his/her building without evicting any tenants, and enables the owner to keep a stake in the building while simultaneously diminishing carrying costs and management responsibilities. The downside of selling the TIC interests one at a time is that the owner must share control with others and rely on their financial strength. But many owners are realizing that they already share control of the building with their tenants and rely on their tenants' incomes. Unlike co-owners, these tenants have no investment in the building and everything to gain from fighting with the owner. The reality may be that while having co-owners is risky, having tenants is much, much riskier.

Tenants in Common T.I.C. | Risks Associated with T.I.C. Investing | | What is a Master Lease? | What is a Triple Net Lease?

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