Are you thinking about buying a CRE property with someone else and are trying to decide whether to hold that property as joint tenants or tenants in common?
Both options present benefits and challenges, and it’s essential to understand how different they are in terms of ownership rights and financial obligations before you decide.
In this CRE guide, we break down the specifics of joint tenancy and tenancy in common — we highlight the pros and cons, how they affect property management, how they affect CRE loans, and how to switch between the two.
We’ll also cover answers to common questions, such as what happens if one owner wants to sell.
Joint tenancy: What it means in CRE
Joint tenancy means equal ownership of a property by all parties involved. Its key feature, called “right of survivorship,” ensures that if one owner dies, their share automatically passes to the surviving owners and bypasses any will.
In theory, this makes everything — from selling to mortgaging the property — much simpler.
This also makes joint tenancy a sensible structure for those who have a strong relationship with their co-owners, as it guarantees a smoother transfer of ownership upon death.
Benefits of joint tenancy in CRE
The biggest benefit of joint tenancy is that it makes ownership transfers seamless when an owner passes away, thanks to the right of survivorship that sidesteps probate, which can be a long and expensive legal process.
Another advantage is that joint tenants typically share the financial responsibilities for the CRE property.
Loan payments and maintenance costs are split between the owners — an arrangement that mitigates the financial risk for each individual investor, allowing for larger-scale investments that might be prohibitive for a single owner.
Joint tenants can pool resources and undertake projects with potentially higher returns while distributing the financial burden and risk associated with ownership.
Beyond the financial advantages, joint tenancy can also bring together individuals with expertise in different areas of CRE — such as property management, legal, or financial analysis.
They can apply their collective knowledge base to make better decisions and improve the asset’s overall performance.
Challenges of joint tenancy in CRE
Of course, joint tenancy isn’t without its issues. Disagreements can come up particularly if co-owners differ on how to use or manage the CRE property.
Since the property is jointly owned, all major decisions about selling or financing must be unanimous. Moreover, leveraging your portion of the property as collateral can be tricky because you technically don’t own a specific, separable share.
Note that joint tenancy carries some financial risks related to creditors — that is, if one joint tenant runs into debt problems, creditors can pursue the entire property to satisfy that debt. This could result in liens against the property or even a forced sale.
Essentially, the other joint tenants might have to cover their co-owner’s debts to protect their own investment. This is a significant risk to be aware of and it’s wise to consider legal safeguards before entering into a joint tenancy.
Tenancy in common: What it means in CRE
Tenancy in common is a form of ownership that allows co-owners to hold different shares of a CRE property, making it a sensible choice for family members or business partners who want clear, individual stakes.
Unlike joint tenancy, which defaults to equal shares, tenancy in common provides the flexibility to allocate specific portions to each owner according to their contributions or according to the agreement.
When a tenant in common passes away, their share does NOT automatically transfer to the surviving owners — instead, it can be bequeathed to heirs as specified in a will or according to intestacy laws.
A tenancy in common also provides more autonomy. You don’t need the consent of the other owners to transfer or sell your share, so you have complete freedom to manage your investment on your terms.
Benefits of tenancy in common in CRE
Perhaps the most appealing advantage of tenancy in common in CRE is the flexibility it provides in structuring ownership.
Unlike joint tenancy where shares are equal, tenancy in common allows owners to tailor their portion of the property to their individual financial capacity or investment goals.
This makes it particularly suitable for groups with varying levels of capital to invest and/or different investment timelines or goals.
Furthermore, tenancy in common provides greater control over estate planning. Each owner can determine how their share of the CRE property will be distributed upon their death, which is important in estate management.
Challenges of tenancy in common in CRE
All that said, tenancy in common also presents some potential challenges in commercial real estate investing.
Because ownership stakes can vary, disagreements may arise regarding how to manage and use the property. These conflicts can sometimes escalate and require legal intervention to resolve.
The absence of automatic survivorship can also be a disadvantage.
As mentioned, a deceased owner’s share does not automatically transfer to the surviving owners — it instead becomes part of their estate and is distributed according to their will or other estate planning documents. This can sometimes complicate matters and potentially lead to time-consuming and costly probate proceedings.
Joint tenancy or tenancy in common: What is better in CRE?
The right choice depends on your and your co-owners’ needs. If you value equal rights and want a straightforward way for property to pass automatically to survivors, joint tenancy could be ideal. It’s simple and circumvents the complexities of wills and probate.
If you prefer more control over how much of the property each owner has, or if you want to ensure specific heirs inherit your share, then tenancy in common might be better. It allows for more tailored planning and investment strategies.
How is a CRE property managed in joint tenancy vs. tenancy in common?
In a joint tenancy, you and your co-owners need to make all decisions together because everyone holds equal rights to the property. Unanimity is required for any major changes — you all must agree.
Conversely, tenants in common have more control over their individual shares, though decisions that affect the entire property still require a majority vote.
This allows owners to manage their own shares as they see fit but ensures that major decisions — like selling the property or making major renovations — are made collectively.
How is a CRE property sold in joint tenancy vs. tenancy in common?
Joint tenancy and tenancy in common work quite differently when it comes to selling or transferring ownership.
In a joint tenancy, everyone needs to agree on a sale. If one joint tenant decides to sell their share, the ownership structure changes. The new owner then becomes a tenant in common with the remaining original owners.
In contrast, in a tenancy in common, you can sell or transfer your share of the property independently without needing approval from the other owners if you can find a buyer who’s interested in purchasing only a portion of the property.
Switching from joint tenancy to tenancy in common
Changing from joint tenancy to tenancy in common requires a formal legal process that is often handled by real estate attorneys (specific requirements vary by state).
This process involves drafting and recording legal documents — typically a new deed that clearly defines the new ownership shares.
Switching from joint tenancy to tenancy in common
Converting back to joint tenancy from a tenancy in common also requires a formal legal process, typically involving a real estate attorney. This usually involves creating and recording a new deed that clearly states the equal ownership shares and reinstates the right of survivorship.
Effect on CRE loans
In a joint tenancy, all owners are usually “jointly and severally” liable for the mortgage —this means that any owner could be held responsible for the entire loan amount, not just their portion.
This shared liability can actually streamline the loan application process. Lenders sometimes see it as less risky because they have multiple parties to turn to for repayment.
However, individual creditworthiness is still important — lenders will thoroughly evaluate each joint tenant’s financial situation, and one weak link can still jeopardize the loan.
In a tenancy in common, owners might split mortgage responsibility proportionally to their ownership shares, or they might agree on a different split. Lenders usually require a formal agreement that clearly defines who is responsible for what part of the loan.
Other alternatives
If joint tenancy or a tenancy in common doesn’t feel like the right fit, there are several alternatives to consider:
- One possibility is community property, which is available to married couples in certain states and provides for equal ownership and rights.
- Another option is a limited liability company (LLC). This business structure allows multiple owners while offering some protection from personal liability.
- Finally, you could consider placing the property in a trust, which can provide tax advantages and protect assets from creditors.
Because choosing the right ownership structure is so important for effective CRE investment management, it’s a good idea to talk with a property law expert or a financial advisor. They can help you determine which structure best serves your personal circumstances and investment goals.
