The trouble with tenancy-in-common
Herrick Partner and Chair of the Tax Department, Louis Tuchman, was quoted in The Real Deal about the tenancy-in-common ("TIC") ownership structure of the landmarked Flatiron Building and the owners' disagreement about the future of the tower, which has been vacant since 2019. The deadlock between the owners led to an auction at which an outsider came in with a winning bid. However, the article notes that the outcome still remains uncertain, and the process "underscored the risk of the building's outdated form of ownership."
As the article notes, a TIC "gives multiple owners of a building equal control over it, no matter the size of their stake." This means that some owners can find themselves bound to someone with whom they do not get along, and, in some cases, any owner can go to court to force a sale of the entire building.
Some TIC structures have included provisions to waive owners' ability to force a sale. "Such provisions are necessary for owners of TIC properties to defer capital gains taxes on their sale by immediately investing proceeds from one asset sale into another. Most TICs are now structured with these 1031 exchanges in mind," noted Louis.
The article also notes that, "[g]enerally, owners can sell their stake or borrow against it without permission from the other owners, though finding a lender to provide such financing can be challenging."
"But even modern TICs come with risks. Because each owner is considered a direct owner, they can act independently, hurting the other owners. Different ownership structures do a better job shielding a property from the whims of a rogue owner," Louis continued.
“By and large, there is an algorithm by which you make decisions about the property,” Louis explained. “Although somebody could get into financial trouble, they can’t encumber the property directly.”
Read the full article in The Real Deal here. Access may require a subscription.