Tenancy in Common (TIC) in U.S. Real Estate: Key Insights for Israeli Sponsors and Investors
In recent years, a number of Israeli-backed U.S. real estate deals have explored the use of a Tenancy in Common (TIC) setup. This structure is sometimes selected for its potential flexibility, tax advantages, or perceived simplicity compared to an LLC. However, it often involves more complexity than anticipated.
For Israeli sponsors raising capital to acquire U.S. property, or for passive investors participating in such deals, a thorough understanding of TIC mechanics is essential prior to commitment. Deals can encounter challenges when the nuances are underestimated, particularly in cross-border contexts.
Breaking Down Tenancy in Common
A TIC allows two or more owners to hold undivided fractional shares in a single property. Key elements include:
- Each owner holds a percentage of the property, such as 25% or 40%.
- Generally, all owners have access to the entire property, without assignment to specific portions.
- Interests can typically be sold or transferred without the consent of the other co-tenants, subject to terms in the governing agreement. See Holding Corp. v. Exeter Holding, Ltd., 900 N.Y.S.2d 356, 358 (2d Dep't 2010)
- A creditor can place liens only against the interest in the real property of a debtor co-tenant without the other co-tenants’ consent. See Kwang Hee Lee v. Adjmi 936 Realty Assoc., 824 N.Y.S.2d 672, 675 (2d Dep't 2006).
Unlike an LLC, TIC owners hold title directly and are listed on the deed. In jurisdictions such as New York, co-ownership generally defaults to a tenancy in common (N.Y. EPTL § 6-2.2(a)) unless the deed expressly creates a joint tenancy with right of survivorship. If the co-owners are a married couple, they are typically deemed tenants by the entirety unless the deed provides otherwise.
A TIC agreement regulates the rights and obligations among multiple owners. Among other provisions, it may include: (1) restrictions on the ability of the Tenants in Common to convey or encumber the Property or their interests in the Property; (2) restrictions on the ability of the Tenants in Common to file a partition action; (3) rights of first refusal; (4) rights of first offer; (5) rights to place a lien upon a defaulting Tenant in Common's interest in the property to the extent any non-defaulting Tenant in Common advances money owing by the defaulting Tenant in Common; (6) operational terms (how the property is managed, how expenses are paid, etc.).
To guarantee enforceability against third parties, co-tenants may also record a Memorandum of Tenancy in Common Agreement in the land records. While the full TIC agreement typically remains private, the recorded memorandum places third parties on notice of key restrictions affecting title, including transfer limitations and other material rights and obligations.
Why Israeli Groups Consider TICs
TICs can be suitable in specific scenarios. They are often used for small groups of experienced investors seeking direct ownership without entity intermediaries. They also support 1031 exchanges, where direct title is required for tax deferral. TICs are commonly employed in “drop and swap” strategies, allowing each co-owner to sell their fractional interest, conduct separate 1031 exchanges, and acquire different replacement properties. Additionally, the structure may appeal for its potential to reduce certain administrative requirements. Certain investors prefer TICs because their name appears on the deed, providing a sense of comfort and tangible ownership.
However, what appears straightforward initially can introduce complications, such as issues with financing.
TIC vs. LLC: The Nitty-Gritty
In Israeli-led syndications or investment clubs, the choice between TIC and LLC impacts control and risk exposure.
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Issue
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Tenancy in Common (TIC)
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Limited Liability Company (LLC)
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Ownership Structure
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All investors are listed on the deed, potentially increasing personal liability. (An LLC can also serve as a TIC owner to provide a liability shield where appropriate.)
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Investors hold membership interests rather than direct title to the property.
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Statutory Rights
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Default statutory rights apply, including the ability of one owner to seek partition, unless provided otherwise in the TIC agreement.
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Rights and obligations are primarily governed by the operating agreement rather than default property statutes.
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Management
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Management rights are typically shared unless provided otherwise in a TIC agreement.
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Allows centralized management through a manager-managed or member-managed operating agreement.
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Liability Protection
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Liability exposure may be more direct without entity-level structuring.
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Offers clearer liability protections when properly formed and maintained.
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Financing Considerations
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Lenders may restrict the number of TIC owners and impose structural conditions.
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Generally more lender-friendly and familiar in commercial financing.
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Typical Use Case
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May be appropriate for small, aligned ownership groups or specific tax-driven scenarios.
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Frequently preferable for platforms aggregating passive investments from Israel or larger syndications.
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For platforms aggregating passive investments from Israel, LLCs and Limited Partnerships are often the more practical choice. They allow centralized management, clearer liability protections, and more predictable lender treatment. TIC structures, by contrast, tend to be better suited to smaller, aligned ownership groups or transactions driven by specific tax considerations.
Overlooked Pitfalls in TIC Deals
Partition Power Plays
In states like New York, TIC owners can petition courts for partition, potentially forcing a sale or division. This can serve as leverage in disputes. To mitigate, agreements can include waivers and buyout provisions, though enforcement depends on precise drafting. In cross-border arrangements, incorporating arbitration clauses can help avoid U.S. court involvement.
Securities Snags
When TIC interests are offered to passive investors dependent on sponsor management, they may be classified as securities by regulators, particularly if they meet the Howey Test criteria of an investment expecting profits from others’ efforts. For investor groups larger than 10-15, early involvement of securities counsel is crucial, especially considering U.S.-Israel tax treaties. For more on securities laws when raising capital for real estate deals and the role of PPMs, see this detailed post: https://www.eladmichael.com/Blog/Raising-Capital-For-Real-Estate-Deals-Understanding-Securities-Laws-And-The-Role-Of-PPMs/#wbb1
Lending Hurdles
Lenders often impose restrictions on TICs, such as:
- Capping the number of owners.
- Requiring unanimous approval for financing actions.
- Enforcing tight transfer controls.
If debt is involved, the structure should align with lender expectations from the outset. Certain lenders may accommodate TICs with strong agreements, but government-backed programs like Fannie Mae or Freddie Mac typically do not for multifamily properties with passive owners.
Deadlock Dangers
TICs can lead to impasses without clear governance, as major decisions may require unanimous or supermajority approval. To address this, agreements can incorporate tiered voting mechanisms, such as majority for operations and supermajority for dispositions.
Joint liability
Co-tenants share joint and several liability for any loss, damage, injury, or death occurring on the property. If one co-tenant pays more than their proportional ownership share in damages, that co-tenant may pursue contribution from the others. However, when the co-tenants agree that one co-tenant has exclusive possession and control of the property, only the co-tenant in possession is responsible for incidents that occur there. See Butler v. Rafferty, 762 N.Y.S.2d 567, 570–571 (2003).
New York-Specific Twists
For properties in New York City, TICs introduce additional considerations:
- Higher transfer taxes on fractional interests.
- Per-owner application of mortgage recording tax, increasing expenses.
- On the death of a co-tenant, probate of the real property generally cannot be avoided.
- Potential personal exposure to tenant claims in rental properties.
- Complex deed recording for foreign owners, often requiring consular notarization.
- Close judicial review of partition waivers.
These factors intersect with FIRPTA withholding for non-U.S. sellers, necessitating coordinated tax planning across jurisdictions.
When TICs Actually Shine
TICs are effective when:
- The group is small and cohesive, with active participation.
- Owners are fully informed of direct-ownership implications, including tax benefits like depreciation pass-through.
- Financing terms support the structure.
- Agreements are bespoke, tailored to the specific property and parties.
- Tax objectives, including avoidance of double taxation under treaties, drive the choice.
- For larger syndications, limited partnerships or LLCs are generally more suitable.
Mistakes That Trip Up Cross-Border TICs
Common errors include:
- Adapting generic agreements without jurisdiction-specific adjustments.
- Selecting TIC for convenience rather than strategic fit.
- Neglecting securities compliance, particularly for digital marketing.
- Failing to synchronize structure with financing conditions, resulting in obstacles.
- Omitting detailed exit strategies, complicating unwinds.
- Selling a co-tenancy interest on the open market may be difficult and it is considered somewhat illiquid.
Addressing these proactively through diligence can prevent issues.
A Practical Approach to These Deals
Evaluating TIC suitability involves assessing:
- Investor numbers and experience levels.
- Day-to-day management arrangements.
- Tax objectives, integrating U.S. deferral rules with Israeli frameworks.
- Disposition options, such as mandatory purchases or auctions.
This analysis clarifies whether TIC or LLC is appropriate.
Thinking TIC for Your U.S. Play?
For Israeli sponsors organizing U.S. acquisitions, investment clubs pursuing joint ownership, 1031 participants considering fractional interests, or platforms facilitating co-investments, careful review of the structure is recommended before finalizing documents or raising funds.