Tenancy in Common Q & A
as applied to 585 Ocean View Boulevard, Pacific Grove, CA  93950

 

WHAT IS A TENANCY IN COMMON (TIC)?

Tenancy in Common is a form of joint ownership of real property.  All Tenants in Common are named on the Title Deed and each owns a percentage interest in the property as a whole.  Thus, if you and I own property as Tenants in Common, we each are listed on the title as “Tenants in Common” owning the property and each has ownership rights to the entire piece of property. 

In this particular application, Tenants in Common means the co-ownership of a multi-unit property in which each owner has an exclusive right to use a particular area of the property.

How does TIC ownership compare to owning a condominium?

With a condominium, the portions of the property inside the apartment walls are owned by individuals, and everything else is owned by a group. In a TIC, a group owns the entire property. TIC owners own percentages in an undivided property rather than particular units or apartments, and their deeds show only their ownership percentages.

How does TIC ownership compare to owning stock in a cooperative (“co-op”)?

In a “stock cooperative” or “co-op”, a corporation or other legal entity owns the property.  The owners of the entity each own shares of the entity, which are personal property, not real property.  The owners each have the right to use a specific apartment, as in a TIC. 

So how does one have exclusive right to one’s own apartment?

That is accomplished by a carefully drafted written agreement executed by all owners, called the TIC Agreement, which provides each owner the right to live in or rent out a particular apartment along with other rights and duties.

WHY CREATE A TIC RATHER THAN MERELY USE THE CONDOMINIUM STRUCTURE?

Because the TIC process is less complex than the condominium process, it is, therefore, less expensive for the seller.  The process can happen more quickly.  The seller can, therefore, offer the property at a lower price when he offers it for sale.

WHAT SHOULD BE INCLUDED IN THE TIC AGREEMENT? 

Each Agreement will vary, but certain common provisions almost always exist. Among them are:

Ø      Provisions providing for non-judicial resolution of any disputes, often using mediation and private arbitration and avoiding the high expense of legal battles in Court;

Ø      Appropriate separation of the property into "individual” and "group" components relating to usage rights and maintenance responsibilities;

Ø      Description of the owners' financial obligations including initial deposits, reserve accounts, taxes, common area maintenance and other expenses; nomination and method of selecting professionals to represent the owners (lawyers, accountants, etc.);

Ø      Formulas for determining each owner’s monthly payment in advance and periodically adjusting the amount;

Ø      Management of the property, including accounts receivable, accounts payable, regular reporting maintenance and janitorial;

Ø      Rules governing usage of the property by the owners (e.g. pets, noise, floor covering) including enforcement provisions;

Ø      Meeting and decision making procedures;

Ø      Provisions defining when a default has occurred and describing remedies;

Ø      Policy in the event of death or bankruptcy of an owner;

Ø      Sale of interests, group approval of prospective purchasers, and rights of first refusal; and

Ø      Provisions to anticipate and remedy the effect of alterations in the law.

Any good attorney will have additional provisions tailored to the unique requirements of the TIC. Given the critical nature of the TIC agreement in the operation and value of the property, it is vital for the Agreement to be correctly drafted and attempts to use forms or “standard” agreements often result in dispute and reduction in the value of each owner’s apartment within the TIC.

Most TIC Agreements are kept “in reserve” by the owners and only used in the event that normal relations among group members break down. While it is useful to have owners' rights and duties well defined, relying on the agreement to dictate response to actual events is often counterproductive.  The give and take of typical ownership arrangements requires flexibility and good will.

 Even the best agreement cannot resolve all unanticipated issues arising and the Agreement, while vital for the future of the TIC, does not take the place of common sense and mature compromise on issues.  The goal should be to develop a consensus that all owners can accept even though some may believe that the agreement dictates a more personally advantageous decision. If a consensus cannot be reached, the TIC agreement can provide a final resolution.

What are the provisions of the TIC Agreement of this project?

The California Department of Real Estate requires a sub-divider of Tenants-In-Common property to submit for DRE approval a TIC Agreement.  This is a lengthy document that will be provided to buyers in its entirety during the inspection period of the escrow.  Following are some of the features (in part) of the TIC Agreement that apply to this property.

·         Occupancy is limited to four persons.

·         Use of a unit is limited to residential use, with minor exceptions.             

·         Parking is limited to motor vehicles and bicycles (no RVs or boats or trailers).

·         No major vehicle repair is permitted on the property.

·         No animals are permitted on the property.

·         Rentals are permitted, subject to local ordinance (30-day minimum).

·         Professional property management is required.  Owners will elect three Directors to interface with the Manager for one year terms.

·         No lien or encumbrance, other than a purchase money mortgage, may be created against the property.

·         A budget, approved by the Dept. of Real Estate, that includes property taxes and insurance, has been established.  Common area maintenance costs and reserves have been allocated in the budget.

·         Property taxes have been estimated in the budget, but will be recalculated based on the purchase price of each unit, since property taxes will vary according to purchase price.

·         Mandatory special assessments must be approved by a majority of owners.

·         Each owner is responsible for maintaining his/her own unit.

·         Each buyer is responsible for his/her own liability and personal property within his/her unit and must obtain appropriate insurance for same.

·         Owners may make improvements within their units.

·         Each owner must contribute an amount equal to two months; assessments to a Default Account.

·         No purchaser will obtain a deeded right to any particular unit. Each purchaser will own an undivided percentage interest in the entire property. The exclusive right to occupy a particular unit will be conferred by the Tenancy in Common Agreement among all of the owners.

·         Each purchaser waives his/her right to partition of the property for five (5) years.

·         No loud noise Sunday – Thursday, 10:30 PM to 8:00 AM; Friday/Saturday/Sunday, midnight to 10 AM.

·         No BBQs on decks, nothing hanging from decks; patio furniture and plants in drip trays are permitted.

·         No smoking in any unit or within 30 feet of a door or window of the building.

·         Regular meetings will be held annually; each unit has one vote.

·         An owner may sell or will his interest.

·         An owner may be forced to sell his/her interest for certain breaches of the Tenancy in Common Agreement.

·         Current owners have a first right of refusal to purchase a unit offered for sale.

·         The TIC Agreement provides for mediation, then arbitration, as a means of dispute resolution.

WHO HAS THE POWER TO MAKE DECISIONS IN A TIC AGREEMENT?

In most TIC Agreements, each owner has one vote. Usually, routine decisions are made by a majority.  Major items such as expensive non-emergency repairs or improvements generally require unanimity or a supermajority (e.g. 75% approval.)

HOW ARE DAY-TO-DAY COSTS HANDLED?

Building expenses are divided into "individual expenses" and "group expenses". Individual expenses include maintenance and improvements to unit interiors, personal property insurance and separately metered utilities.  These expenses are paid directly by the individual owners. Group expenses include building insurance, property taxes, maintenance and improvements to common areas, and shared utilities.  Group expenses are paid through a group bank account using a monthly assessment system. Under this system, each owner makes a single monthly payment to the group account. The monthly payment is based upon the total of the owner's share of each of the anticipated group expenses. To add predictability and protect against default, even semi-annual and annual expenses, like property taxes and insurance, should be included in the owners' monthly payments.

WHO MANAGES THE DAY-TO-DAY MATTERS?

TICs often hire a professional property manager, usually one who is experienced in Home Owner Association management.  The property manager is responsible for the usual operations of the TIC matters, including collecting monthly payments, paying bills, keeping the books, and arranging repairs. The owners meet periodically with the manager to determine the anticipated expenses for the next period, including but not limited to insurance, utilities and replenishment of reserves, and to then establish each owner’s monthly payment. The cost of the property manager is part of the monthly assessment.

How is the purchase of a TIC financed?

Several lenders currently offer TIC financing under which each co-owner has his/her own loan. Individual tenancy in common loans are secured by the borrower’s percentage share in the property, meaning that the borrower’s mortgage default does not impact the other co-owners. If the borrower defaults on his/her loan, the lender can foreclose on only that owner’s share. The lenders who have indicated that they are prepared to loan on this project are listed at www.585ocean.com . 

How are property taxes handled in a tenancy in common?

Since the TIC property is one legal property of record, the owners will receive one property tax bill,  as opposed to individual tax bills for each owner. Each owner’s share is usually based on the purchase price of his/her interest.   When the property tax increases due to a resale of a share, the new buyer will be expected to pay the increased amount. If property taxes increase due to improvements or reassessments, the increase should be assumed by each owner according to the percentages derived from the previous purchase prices.

How does a buyer get started with a tenancy in common purchase?

The buyer will benefit from representation by a Realtor whom he/she trusts, as well as an attorney who is experienced with tenants-in-common ownership of multi-unit buildings.   The Realtor can Explain the purchase agreement and other related forms, and the attorney can review the TIC Agreement and discuss the issues associated with group ownership.

 

How are tenancy in common ownership percentages determined?

The answer to this question varies from TIC to TIC.  In some groups, each owner holds an equal share.  In others the shares are determined by the relative value or square footage of the assigned areas of the property.  In this particular project, the ownership percentages are based on the square footage of each unit.  The ownership percentages are often used to allocate shared expenses, such as insurance and common area maintenance.  

HOW DOES A TIC OWNER SELL HIS/HER OWN INTEREST?

By law, TIC interests can be sold at any time for any price the market will bear. The TIC Agreement will often provide that the group approves of the qualifications of the purchaser. This is important since otherwise a new buyer could come in who could entirely disrupt the smooth operation of the TIC.  Reasonable criteria should be set out in the TIC Agreement.

DOES A TIC PROVIDE THE SAME TAX BENEFITS AS OTHER RESIDENTIAL REAL ESTATE?

The typical tax benefits available to property owners are available to TIC owners. Owners who reside in the property can deduct their mortgage interest and property taxes, and often may avoid capital gains tax on resale. Owner who rent out their premises can declare their income and expenses, including depreciation, and may undertake a tax-deferred exchange.

ARE TICs SO COMPLEX OR RISKY THAT ONE SHOULD AVOID THEM?

Many of the risks and benefits of TIC ownership are similar to those of ownership of a condominium or other shared property.  All forms of co-ownership forms (TICs, condominiums, cooperatives, partnerships etc.) involve the risks of sharing the use of property with others and relying on them to fulfill their obligations to you.  Some people feel that the risks are offset by the benefits of lower acquisition cost, lower maintenance costs, and the reduction or elimination of management of the property. 

The following steps minimize the risk of TIC ownership:

ü      An exhaustive evaluation of the property and financing;

ü      Creation of a customized TIC agreement that ever member of the group fully understands;

ü      Using a month assessment system for payment of group expenses;

ü      Establishment of a default reserve fund; and

ü      Strong procedures to enforce the TIC agreement, and buy out a defaulting owner or an owner who causes needless problems within the TIC.

 

For the answers to any additional questions regarding the project at 585 Ocean View Boulevard, please contact the listing broker, Jan Leasure, at 831 658 4003 or Jan@MontereyRentals.com.  For additional information about TICs in general, please contact your attorney.