Tenant-in-Common (TIC) is a type of ownership structure for holding title to real estate assets. The TIC structure gives each owner an undivided interest in a property and is often used in 1031 exchanges. The TIC investors receive a separate deed and title insurance for their percentage interest in the property.
Some of the benefits of TIC arrangements are:
typical real estate benefits (net income, tax benefits, growth, etc)
no day-to-day management responsibilities
the ability to acquire higher quality assets since the lower equity requirements (ie. $100,000) allow you to invest in institutional grade assets
the ability to diversify one’s portfolio since you can acquire properties in other parts of the country and invest your 1031 Tax Free Exchange into more than one asset
debt on TIC transactions are typically non-recourse (no personal guarantee) except for standard “bad boy” carve outs”;
easy to identify properties for 1031 transactions or have a second choice in the event that your preferred transaction falls through
A TIC sponsor, who is usually a trust subsidiary, real estate investment company or entrepreneur, arranges the structure. The sponsor will identify the property, perform the due diligence, enter into the purchase and sale agreement, arrange financing and sell TIC interests to investors. The TIC interest may be prior to closing in which case the equity for the acquisition is from the TICs or post-closing.
When forming TIC structures for 1031 exchanges, individuals are not usually investors in the asset. Instead, the investor will form a special purpose entity to hold their interest in the property. This entity is a bankrupt remote, single-member LLC; this provides the co-owners and lenders with additional liability protection.
The responsibilities of the various TIC investors are outlined in the TIC agreement (just as an operating agreement outlines the responsibilities of partners in a partnership). Also, the individual TICs sign additional documents giving the TIC sponsor the right to handle the day-to-day operations of the property. This can be achieved in two ways, through a master lease or management agreement.
Under the master lease arrangement, each TIC is a Master Lessor (landlord) of the property. The Master Lessor then leases the property to a Master Lessee (typically owned by the TIC sponsor); this Master Lessee then subleases the property to the property’s individual tenants. The TIC sponsor (who owns the Master Lessor) will act as a property manager and oversee the property operations; they will collect rents, perform maintenance, lease vacant space, etc. The TICs are then paid a fixed rent based on the master lease; any income above the master lease rent is for the benefit of the Master Lessee (TIC sponsor). This results in a fixed and predictable cash flow stream for the TIC investors while the TIC sponsor enjoys the upside.
On the other hand, some TICs may sign a management agreement with the TIC sponsor. The management agreement will give the TIC sponsor the right to manage the property for a fixed period of time usually with some renewal options. The TIC sponsor (who is acting as a property manager) is then paid a management fee. This may be a fixed amount or a % of revenues. The TIC investors typically then receive 100% of the net cash flow (after expenses and debt service). This gives the TIC investors an interest in the upside of the property while the TIC sponsor just receives fee income.
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