1031 Exchange Bros Video – What EVERY Investor Should Know About TIC Agreements!

Just as they would have an operating agreement for the limited liability company, it is essential to have a Tenancy in Common (TIC) agreement. Even if it’s just a situation where, for example, you and I decide to buy a place in Sun River as a vacation property, we should have a TIC agreement. This agreement should spell out what happens if, five years from now, I want to get rid of that property and you want to keep owning it. What happens with the loan on it even? It’s certainly a good idea to have a TIC agreement, but often it’s not the case in such situations.

If we go in 50/50 on a piece of property, which is the case in most TIC arrangements, and it’s either not stated on the deed, then it’s assumed it’s 50/50. Alternatively, there could be a stated allocation, such as you owning an undivided 30% and me owning an undivided 70% of the property as tenants in common. However, that’s not enough to spell out how the property should be treated over the hold period and in the future when the property sells. We don’t see that attention to detail very often, though, not usually.

It’s crucial to have a lawyer handle this process, and I always say you need a lawyer you’re paying to do the work, not one you’re paying to learn how to do the work for you. With any of these agreements, it’s important to do your homework. When considering partnerships, there’s actually something called a TICership that some lawyers are developing these days.

We often encounter people who want to go into a piece of property together. For instance, we might have someone selling a piece of property and they have $500,000 in cash from one they own free and clear. They want to use this to purchase a new property with another partner, often an adult son or daughter. They intend to enter the property as tenants in common.

Suppose they’re buying a million-dollar property; our client has $500,000 to contribute, while the partner might only have $50,000 or $100,000. Yet, they seek to be 50/50 owners. This arrangement typically does not work out well. A well-drafted TIC agreement can address these issues. If someone contributes 56% of the down payment, and they say the other partner will take on all the debt despite having less equity, it complicates matters.

When a lender is involved, both parties are usually on the debt. It becomes challenging to argue that they have different debt obligations when they clearly have different equity allocations. Thus, if one is a 56% owner, they should also have 56% of the debt. Having a great partner and a TIC agreement with two partners holding different loan values in the same TIC is crucial.