Key takeaway
Tenancy in common (TIC) gives CRE investors a way to diversify their portfolios and invest in larger properties. Essentially, it lets you share ownership without losing control over your share, making it a flexible option if you’re looking to manage your investments on your terms. But while TIC can give CRE investors a lot of flexibility, it is also legally and operationally complex. Take the time to understand the nuances of this structure to avoid conflicts.
In commercial real estate, how you structure a CRE asset’s ownership affects everything — from how the property is managed to how it will be sold in the future.
Tenancy in common essentially allows multiple CRE investors to share ownership. This widely-used structure lets two or more individuals or entities hold an undivided interest in the entire property, with each owner having equal rights to access and use it.
Unlike other arrangements, TIC doesn’t divide the property into sections — you own a share of the whole asset, no matter how big or small your stake is.
Key characteristics of TICs
- Shared ownership – When you invest through a TIC structure, you and the other co-owners share ownership of the entire property. You don’t own a specific part of it — you all have equal rights to use and access the whole asset. This setup gives you the benefit of pooling resources to acquire properties you couldn’t buy on your own.
- Flexible ownership percentages – TIC structures let you invest based on what you can contribute. To oversimplify, for example, one investor might hold a 60% share while another owns 40%. This means that CRE investors with varying investable capital sizes can get involved in larger deals.
- Independent transferability – For many Cre investors, one of the biggest advantages of TIC is that it gives you the freedom to sell, transfer, or bequeath your ownership share without needing approval from the other owners. You can make decisions about your investment independently, which isn’t always the case with other ownership structures.
- No right of survivorship – Unlike joint tenancy, TIC doesn’t automatically transfer your ownership share to the other co-owners if you pass away. Instead, your share goes to your heirs or beneficiaries based on your will or local laws. You have control over who inherits your investment.
Benefits of TICs in commercial real estate
- Tax advantages for wealth-building – If you’re the kind of CRE investor who thinks in terms of decades, TICs may be worth looking into because they can offer financial advantages in the long term — especially when paired with 1031 exchanges. These exchanges let you defer capital gains taxes when you reinvest your proceeds into a new property, so you can keep more of your money working for you.
A TIC strategy (used correctly over decades) can multiply your invested capital far beyond what you’d achieve if you paid taxes on each sale. Instead of losing a chunk of your gains to taxes, you can roll over the full amount into new investments and grow your portfolio faster. This compounding effect can be a powerful tool for building wealth for CRE investors with a long-time horizon.
To know more about why TICs make sense for 1031 exchanges, scroll down to the last section of this blog (Can TICs enable 1031 exchanges?).
- Increased investment access – TIC structures let you get into larger CRE properties without needing to go it alone. You can join forces with other investors and participate in deals that might otherwise be out of reach.
- Diversification – TICs help you spread your bets. Instead of putting all your capital into one property, you can diversify by investing in multiple TIC deals so that you’re not overexposed to any single asset.
- Other tax advantages – Some TICs come with tax perks such as pass-through taxation, which means the income or losses from the property go straight to you as an individual owner. This can potentially keep your overall tax bill lower compared to other ownership setups.
- Flexibility when it’s time to sell – A TIC structure also gives you more control when it’s time to sell. Let’s compare it with an LLC to illustrate the point.
In a typical LLC ownership, all members must agree to reinvest in the next project for a 1031 exchange to work. This can limit your options if the group doesn’t want to stick together.
But with a TIC, you don’t have that problem. Each owner can decide what to do with their share of the proceeds. If you want to roll your gains into another property, you can. If another owner wants to cash out, they can do that, too. You’re not tied to what the others decide. This flexibility is what makes TIC appealing to investors who want autonomy over their investment strategies.
Disadvantages of TICs in commercial real estate
- Lack of control – Everyone gets a say in the big decisions in a TIC, which can be good for accountability but also means that you could run into disagreements with the other owners of the CRE asset.
- Liquidity challenges – Selling your share in a TIC isn’t as simple as selling a whole property. You need to find someone willing to buy a fractional ownership stake. Depending on the CRE asset itself and the market conditions, this can take time (in some cases years) and make it harder to cash out when you want to.
- Management complexity – Running a TIC property isn’t as straightforward as managing a property on your own. You’re dealing with multiple owners — which means more opinions, more agreements to manage, and more potential for disputes. You need solid agreements in place to keep things running smoothly.
Important considerations
- Active investment – Do note that TIC ownership isn’t entirely passive because they function as a group of co-owners who need to agree on major decisions that require unanimous consent (like selling the property). And if the CRE property has a mortgage, lenders may require each TIC owner to go through underwriting. This adds another layer of complexity, but it ensures that all owners meet the lender’s requirements.
Do you prefer a hands-off approach where you focus primarily on financial returns and delegate day-to-day management to someone else? An LLC structure — where a general partner typically handles management decisions — might be a better match. But if you are the active investor type, TIC lets you get more involved in your investment.
- Operating agreement – Your operating agreement needs to be rock-solid and should cover who’s responsible for what, how decisions get made, and what happens if there’s a dispute. Without a clear agreement, you’re leaving too much to chance.
- Legal and tax implications – TIC ownership has its own legal and tax wrinkles, so be sure to get advice from your legal and tax advisors.
Can TICs enable 1031 exchanges?
Many investors looking to use 1031 Exchanges use TICs. Here’s why: This structure allows you to treat a fractional property interest as “like kind” to a full property, which is crucial for keeping your gains deferred when you move from one property to another.
Let’s say you sell a property at a profit. You have two choices:
- You can pay the capital gains taxes and reinvest whatever’s left. You can put that money into another property, a partnership, or even other asset classes, but you’ve taken the tax hit.
- Or, you can defer the capital gains by placing the sale proceeds with a qualified intermediary and starting a 1031 Exchange. You get to reinvest the full amount into another like-kind property without paying taxes right away.
You need a structure that qualifies as “like kind” property if you want to go with option two. A partnership interest does not cut it for a 1031 Exchange, but a TIC arrangement does, so it’s preferable for investors who want to keep growing their portfolios without giving up their gains to taxes.
Conclusion
Tenancy in common can be a practical way for multiple investors to co-own a CRE building. It also allows CRE investors to defer capital gains through follow-on 1031 Exchanges and therefore makes it easier to reinvest profits into larger properties without taking a tax hit.
TICs also give CRE investors the ability to exchange a smaller property (like a single-family rental) for a fractional share in a much larger asset (such as a 200-unit multifamily property), therefore giving them a way to step into deals that would otherwise be too expensive.
That said, you’re not just a passive investor when you join a TIC — you become an active participant in managing the property. You will need to be involved in decisions on property management and finances, as well as in settling potential conflicts. Make sure that you understand these obligations before diving in.
While a well-structured TIC can offer long-term benefits when used as part of a broader investment strategy, it’s essential to go in with eyes open and understand both the opportunities and the responsibilities that come with this type of ownership.
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