Tenants in Common Real Estate Investing Guide

What Is a Tenants in Common (TIC) Structure in Commercial Real Estate?

A tenants in common (TIC) arrangement allows multiple investors to hold fractional ownership interests in a single commercial property. Each TIC investor holds a separate, undivided interest recorded as a deed percentage. Unlike joint tenancy, TIC interests do not include rights of survivorship, meaning each owner can independently sell, transfer, or bequeath their share.

TIC structures became a mainstream investment vehicle after the IRS issued Revenue Procedure 2002-22, which established guidelines allowing TIC interests to qualify for 1031 tax-deferred exchanges. This ruling transformed TIC investing from a niche legal arrangement into a legitimate pathway for passive commercial real estate ownership.

The maximum number of TIC investors per property is 35, as defined by Revenue Procedure 2002-22. Each investor receives a proportional share of rental income, tax deductions (including depreciation), and appreciation. TIC investors are listed individually on the property deed, giving each person a direct real property interest rather than an entity-based holding.

TIC investments typically range from $100,000 to $2 million per investor, providing access to properties valued between $5 million and $75 million. Common TIC property types include Class A office buildings, grocery-anchored retail centers, medical office complexes, industrial distribution facilities, and multifamily apartment communities. The sponsor, typically a real estate firm specializing in fractional ownership, identifies the property, structures the offering, arranges financing, and manages ongoing operations on behalf of the investor group.

How Does TIC Ownership Differ From Other Co-Ownership Structures?

Understanding how TIC compares to alternative ownership models is essential for selecting the right investment structure. The three most common comparison points are Delaware Statutory Trusts (DSTs), limited partnerships (LPs), and limited liability companies (LLCs).

TIC vs. DST: Both TIC and DST structures qualify for 1031 exchanges, but they differ in governance. TIC investors hold direct deeded interests and retain voting rights on major property decisions. DST investors hold beneficial interests in a trust and have no management authority. DSTs can accept unlimited investors, while TICs are capped at 35. TIC investors can arrange individual financing, while DST investors cannot place new debt.

TIC vs. LP/LLC: Limited partnerships and LLCs are entity-based structures. Investors hold partnership or membership interests rather than direct property interests. This matters because partnership interests do not qualify under Section 1031. TIC investors can individually execute 1031 exchanges into or out of the property, while LP and LLC members generally cannot.

TIC vs. Joint Tenancy: Joint tenancy includes automatic right of survivorship, meaning a deceased owner's share transfers to surviving owners. TIC does not. A TIC owner's interest passes through their estate according to their will or trust, providing greater estate planning flexibility.

For investors evaluating entity structuring options, the choice between TIC and entity-based ownership often comes down to 1031 exchange eligibility and individual control preferences.

Why Do Investors Choose TIC Structures for 1031 Exchanges?

The primary driver behind most TIC investments is 1031 exchange eligibility. When an investor sells a commercial property and needs to identify replacement property within 45 days, TIC interests offer a compelling alternative to purchasing an entire property alone.

Access to larger, higher-quality assets. A solo investor selling a $1.5 million property may struggle to find a single replacement asset that matches or exceeds that value. A TIC interest allows that investor to co-own a $30 million Class A office building, gaining exposure to institutional-grade real estate otherwise inaccessible.

Diversification across property types and markets. Investors completing a 1031 exchange can split proceeds across multiple TIC interests in different properties, geographies, and asset classes. An investor with $2 million in exchange proceeds could place $700,000 in a medical office TIC, $700,000 in an industrial warehouse TIC, and $600,000 in a multifamily TIC.

Passive management. TIC properties are managed by a professional sponsor through a management agreement. Investors receive monthly or quarterly distributions without landlord responsibilities.

Flexible investment sizing. Each investor's share is independently calculated, accommodating a wide range of investment amounts. This flexibility is critical for 1031 exchangers who must invest exact dollar amounts to avoid taxable boot. Use our commercial mortgage calculator to model your replacement property investment.

What Are the SEC Regulations Governing TIC Investments?

TIC interests are subject to securities regulations because they are marketed as passive investment opportunities with returns generated through the efforts of the sponsor. The SEC considers most TIC interests to be securities under the Howey Test, requiring sponsors to either register the offering or qualify for an exemption.

Regulation D Exemptions. Most TIC offerings are sold under Regulation D, Rule 506(b) or 506(c). Rule 506(b) allows sponsors to raise unlimited capital from accredited investors and up to 35 non-accredited sophisticated investors, but prohibits general solicitation. Rule 506(c) permits advertising but restricts participation to verified accredited investors.

Accredited Investor Requirements. An individual must have net worth exceeding $1 million (excluding primary residence) or annual income exceeding $200,000 individually ($300,000 jointly) for two consecutive years with reasonable expectation of the same.

Sponsor Obligations. TIC sponsors must provide a Private Placement Memorandum (PPM) disclosing property details, financial projections, risk factors, fee structures, management arrangements, and exit strategies.

Blue Sky Laws. TIC offerings must comply with state securities laws in every state where interests are sold. Some states require notice filings, while others impose additional disclosure requirements or fee schedules. Working with a securities attorney experienced in TIC transactions is critical for both sponsors structuring offerings and investors evaluating them.

What Does Revenue Procedure 2002-22 Require for 1031 Eligibility?

Revenue Procedure 2002-22 defines when a TIC interest qualifies as a direct interest in real property for 1031 exchange purposes. If a TIC structure fails any of these tests, the IRS may recharacterize the arrangement as a partnership, disqualifying it from 1031 treatment.

Maximum 35 co-owners. The property may have no more than 35 tenants in common. Married couples filing jointly count as one co-owner.

No entity treatment. The co-ownership must not file a partnership tax return or hold itself out as a business entity. Each investor reports income on their individual tax return (Schedule E).

Unanimous consent for major decisions. Selling the property, refinancing, and entering major leases require approval from all co-owners.

Limited manager authority. The property manager operates under a defined agreement with market-rate compensation, reasonable term, and terminability by co-owners.

Rental activities only. The TIC arrangement cannot operate a business. Revenue must come solely from rents.

Proportional sharing. All income, expenses, and liabilities must be shared proportionally based on ownership percentage.

How Is Financing Structured for TIC Properties?

Financing a TIC property presents unique challenges. Lenders must evaluate multiple borrowers, complex ownership structures, and the interplay between individual TIC interests and property-level debt.

Blanket loans. The most common approach is a single mortgage covering the entire property, with all TIC investors signing as co-borrowers. This simplifies underwriting and secures better rates but creates cross-default risk. Lenders offering permanent loans for TIC properties typically require all investors to meet minimum credit and net worth thresholds.

Individual loans. Revenue Procedure 2002-22 allows each TIC investor to obtain separate financing secured by their undivided interest. Individual loans eliminate cross-default risk but are harder to originate. Rates are typically 50 to 150 basis points higher than blanket loan rates.

LTV considerations. TIC properties typically require lower LTV ratios of 60% to 70%, compared to 75% to 80% for conventional commercial loans. This means TIC investors must contribute more equity per dollar of property value. For example, on a $20 million property, a 65% LTV blanket loan would require $7 million in combined equity from the TIC investor group.

Debt service coverage. Lenders may require higher DSCR minimums (1.30x to 1.40x) to account for multi-borrower risk. Use our DSCR calculator to assess whether a TIC property's income supports financing.

Contact Clearhouse Lending to discuss financing options for TIC acquisitions and refinances.

What Are the Key Components of a TIC Management Agreement?

The Tenancy in Common Agreement (TICA) and the property management agreement form the governance framework for TIC investments. These documents define decision-making, cash flow distribution, and dispute resolution.

Decision-making tiers. TIC agreements establish three levels. Day-to-day operations are delegated to the property manager. Significant decisions require majority vote by interest percentage. Major decisions require unanimous consent.

Distribution waterfall. Operating expenses and reserves are funded first, followed by debt service, management fees, and then investor distributions. Agreements specify distribution frequency, minimum reserves, and capital call procedures.

Property manager compensation. Sponsors typically earn management fees of 3% to 6% of gross income, plus acquisition fees (1% to 3%), disposition fees (1% to 2%), and potentially refinancing fees.

Dispute resolution. TIC agreements should include mediation and arbitration provisions. Common dispute triggers include capital expenditure timing, lease renewal terms, and property sale decisions.

Transfer restrictions. Most agreements include right of first refusal (ROFR) provisions requiring the investor to offer their interest to existing co-owners before selling to outside parties.

What Exit Strategies Are Available to TIC Investors?

Exiting a TIC investment requires more planning than selling a wholly owned property. The fractional nature of TIC ownership, combined with transfer restrictions and limited secondary market liquidity, means investors should understand exit pathways before they invest.

Full property sale. When all co-owners agree to sell the entire property, proceeds are distributed proportionally. Each investor can independently execute a 1031 exchange into a new replacement property. This is the preferred exit because selling the full property maximizes value.

Individual interest sale. An investor can sell their TIC interest to a new buyer, subject to ROFR provisions and sponsor approval. Discounts of 10% to 30% below proportional property value are common for individual TIC interest transfers.

1031 exchange out of TIC. Because TIC interests qualify as direct real property, investors can use a 1031 exchange to defer capital gains when selling. The investor can exchange into another TIC, a DST interest, or a wholly owned property.

Refinance and cash-out. If the property has appreciated, the investor group can refinance the property and distribute excess proceeds. This provides liquidity without triggering a taxable sale event.

Partition action. As a last resort, a TIC investor can file a legal action to force a property sale or physical division of the asset. Partition actions are expensive, time-consuming, and damaging to co-owner relationships. They are rare in professionally sponsored TIC investments because management agreements typically include mandatory arbitration clauses. However, the right to partition cannot be fully waived in most states, serving as an important investor protection mechanism.

What Are the Risks and Challenges of TIC Investing?

TIC investments carry specific risks that differ from direct property ownership. Understanding these risks is essential for informed decision-making.

Illiquidity. TIC interests are not traded on public exchanges. An investor who needs to liquidate quickly may face significant discounts or extended marketing periods of 3 to 12 months.

Unanimous consent bottlenecks. If one investor out of 35 refuses to approve a sale or refinance, the entire group can be stuck in a suboptimal situation. Well-drafted TIC agreements include buyout provisions and dispute resolution mechanisms, but consensus challenges remain inherent.

Sponsor risk. The sponsor controls property management, financial reporting, and operations. Due diligence on the sponsor's track record, financial stability, and reputation is as important as underwriting the property itself.

Cross-default risk. In blanket loans, one investor's failure can trigger default for all co-owners. TIC agreements should include cure provisions allowing other investors to cover a defaulting member's obligations.

Tax complexity. Investors in TIC properties across multiple states may need to file state tax returns in each state where a property is located.

How Do You Evaluate a TIC Investment Opportunity?

A disciplined underwriting process separates profitable TIC investments from problematic ones. Evaluate every opportunity across these dimensions before committing capital.

Property fundamentals. Analyze location quality, tenant creditworthiness, lease terms, occupancy history, capital expenditure needs, and comparable rents. Use our commercial mortgage calculator to stress-test the financial projections provided in the PPM.

Sponsor track record. Review the sponsor's history of TIC offerings including realized returns, hold periods, exit execution, and investor communication. Verify that the sponsor has no SEC enforcement actions, FINRA complaints, or litigation history.

Fee analysis. Calculate the total fee burden as a percentage of invested capital. Compare upfront fees (acquisition, organizational) with ongoing fees (management, asset management) and exit fees (disposition). Total fees exceeding 15% to 18% of equity may significantly erode returns.

Debt structure. Evaluate interest rate, amortization, maturity date, prepayment penalties, and recourse status. Understand what happens at loan maturity and whether the property needs to be sold or refinanced.

Legal document review. Have your attorney review the TICA, PPM, and management agreement. Pay attention to voting thresholds, transfer restrictions, capital call provisions, and dispute resolution procedures.

Schedule a consultation with Clearhouse Lending to evaluate acquisition financing for TIC investments you are considering.

Frequently Asked Questions About Tenants in Common Real Estate?

What is the maximum number of investors allowed in a TIC property? Revenue Procedure 2002-22 limits TIC ownership to 35 co-owners per property. Married couples filing jointly count as one co-owner. Exceeding this limit risks IRS recharacterization as a partnership, disqualifying 1031 exchange treatment.

Can I use a 1031 exchange to invest in a TIC property? Yes. TIC interests qualify as direct interests in real property under Revenue Procedure 2002-22, making them eligible replacement property for 1031 exchanges. You must meet all standard 1031 timelines and rules.

What is the difference between a TIC and a DST? TIC investors hold deeded interests and retain voting rights on major decisions. DST investors hold beneficial trust interests with no management authority. TICs are limited to 35 investors while DSTs have no cap. TIC investors can obtain individual financing, while DST investors cannot.

How liquid is a TIC investment? TIC investments are illiquid. There is no public exchange for fractional commercial real estate interests. Selling an individual TIC interest typically takes 3 to 12 months and often requires a 10% to 30% discount. Plan for a 5 to 10 year hold period.

What happens if a TIC co-owner dies? A deceased owner's interest passes through their estate according to their will or trust. The heir receives a stepped-up tax basis equal to fair market value at the date of death, eliminating unrealized capital gains on that interest.

Can TIC investors be held personally liable for property debts? Investors who sign a blanket mortgage are personally liable under recourse loan structures. Non-recourse loans limit liability to the property itself, with standard carve-outs for fraud, environmental contamination, and voluntary bankruptcy.

What fees should I expect in a TIC investment? Typical fees include acquisition fees (1% to 3%), management fees (3% to 6% of gross income), asset management fees (0.5% to 1% annually), and disposition fees (1% to 2%). Total upfront costs typically range from 8% to 15% of invested capital.

How are TIC investment returns taxed? Investors report their proportional share of rental income and expenses on Schedule E. Depreciation deductions can shelter a significant portion of cash flow. Upon sale, gains are subject to capital gains tax and depreciation recapture, unless the investor executes a 1031 exchange.

Sources?

1. Internal Revenue Service, Revenue Procedure 2002-22, "Guidelines for TIC Arrangements," IRS.gov
2. Securities and Exchange Commission, Regulation D, Rule 506(b) and 506(c), SEC.gov
3. Internal Revenue Code Section 1031, Cornell Law Institute, 26 U.S. Code Section 1031
4. National Real Estate Investor, "TIC Structures in Commercial Real Estate: Market Analysis," 2024
5. American Bar Association, "Tenancy in Common Arrangements: Legal and Tax Considerations," Real Property Section, 2023

Ready to explore TIC investment financing or structure a 1031 exchange into a fractional commercial property? Contact Clearhouse Lending today to discuss your options with our commercial lending team.