In this article, we are going to discuss some of the disadvantages of the Tenancy in Common or TIC co-ownership strategy and let you understand why it has fallen out of favor. But before we delve into the disadvantages of this form of co-ownership, let’s look at what TICs or Tenancy in Common is all about.
What is a Tenancy in Common?
Tenancy in Common is a form of co-ownership where one or more individuals own an interest or shares in a piece of property. For example, tenants in common may have different ownership interest. Tenant A and Tenant B may each have 25% interest stake in the property, and Tenant C may own 50%.
Also, interests in Tenants in Common may be acquired at different periods. So, Tenant A or B or even C may be able to purchase an interest after several years and at different times. And each Tenant in Common can receive ownership interest through separate conveyances. Tenant A and Tenant B may be on the same title while Tenant C has their own distinct title. The only thing tenants in common truly share is ownership.
Furthermore, when one of the owners dies in a tenancy in common agreement, that person’s proportionate interest in the property does not automatically go to the other joint owners. Instead, it is passed on in accordance with the wishes of the deceased. If no specific beneficiary is present, then it is distributed in line with intestacy laws.
Disadvantages of Tenants in Common
- Each tenant in common interest is an asset of each co-owner and is subject to each of his/her co-owner creditors. That’s simply too much risk in our opinion for an investor to take. Not only do you have to worry about your creditors, you have to worry about each of you co-owners creditors.
- All tenants have equal right to possession. The main problem with Tenants In Common is that the other tenant(s) can do whatever they want with their interest in the property. One of the co-owners could take out a loan on his/her interest in the property. Additionally, the T.C. interest owned by one owner is subject to that owner’s creditors.
So, if a co-owner named Mark owns a 50% interest in a $600,000 vacation condo as a Tenant in common with his brother Jude, Mark’s 50% interest can be taken from him in a lawsuit or normal negligence case. There is no protection of that interest.
- There is a no direct right to survivorship. This is because interest in the property may be transferred by will.
- Tenants in common can decide to sell their interest in the property to just any individual. Existing co-tenants may discover that they now own the property with an entirely new co-owner who may not understand the purpose of the investment. Sometimes, a new co-tenant may force the existing co-owners to sell the property or file a partition action suit.
Final Thoughts and Why TICs went out of Favor
If you want your investment passed on to your children when you die, you might consider tenancy in common since it gives you the assurance that your interest will be transferred to your estate upon your demise. However, tenancy in common comes with a lot of disadvantages such as separate ownership and limited control over the actions of your co-owners.
Here’s what could happen. It could be 2008-2009 and you own a TIC. We see a severe price drop in real estate prices as it did and the TIC you own has to restructure for various reasons to avoid disaster. There are 30 owners of the TIC. In order to restructure guess how many of the 30 must agree to the terms of the restructuring? If you answered 30 you are correct. This real time experiment or period marked the end of the TIC as a popular 103 replacement property alternative and gave way to the Delaware Statutory Trust or DST. We like to think of a DST as a TIC 2.0. A DST is simply a better version of a TIC. We think the potential for a bad outcome is so high with TICs that our firm will not recommend TIC sponsors to our clients.
Before choosing one option over another, you should seek legal advice based on your situation so that you know that you are making the right decision.