One strategy of acquiring investment properties is to pool individual owner’s equity stakes and take title as Tenants In Common, or a TIC. TICs feature an undivided unity of possession, but they may, or may not have unities of percentage of ownership, title, or time of acquisition and disposition. Upon the demise of a co-tenant their interest passes to their devisees/heirs, not the co-tenants. It is critical that an executed Operating Agreement be in place to define critical items including:
*Ownership percentage *Conditions under which the property will be sold *How distributions from operations will be made *Rights and responsibilities of each investor *How to handle cash calls, should they be required *How individual TIC owners may dispose of their interest before the property is soldSTRENGTHS INCLUDE: Pooling resources may permit the ownership of far larger assets than could be acquired individually, resulting in economies of scale for management and maintenance. The investor that owns a 10-plex can’t afford MBO (Management By Others). 4 or 5 TIC investors that put that each contributed the same amount as the 10-ples owner could afford to have a live-in manager. Then the job becomes managing the manager…which is far less time consuming.
Overall flexibility. TICs permit owners to sell, encumber, or convey their interest without permission of their co-tenants. Depending on the structure of the Operating Agreement, TICs may permit General Partners to run the asset, allowing investors to have the benefits of owning an asset without having to be involved in routine operations.
WEAKNESSES INCLUDE: Litigation is more likely. Closings are more cumbersome. Coordinating items that require input from the co-tenants is more involved. People ask me if its really important to have a lawyer draw up docs for a TIC. I respond by telling them that, yes the first time they create a TIC they should consult an attorney…and every time thereafter. It is important to understand the actions you are required to take…and those you may not take…to avoid the creation of a security.
Note: The information contained herein is deemed accurate and reliable, but is not guaranteed. To assess applicability to individual situations please consult your legal professional. For the additional information about a highly respected Real Estate Law Practice contact me at: 503.577.1034 or rick@rosecitycre.com.