The Truth About Tenants in Common

Buffalo, NYInvestors with their money in Tenants in Common agreements might be glad they do not have their money in other investments, but they may be surprised to learn that their real estate investments could also be losing value. Unfortunately, many thought their investment was risk free and they would be fine in the economic crisis only to learn that there is risk involved in TICs.

Tenants in Common investments are also known as undivided fractional interests. Essentially, all those who purchase a tenant in common structure in an asset get a percentage ownership and have the same ownership rights, regardless of how much they have invested in the property. The investors have all ownership benefits and can receive rental income if the property is rented out (which is common in tenants in common investments).

Many investors, including those who are not particularly experienced at investing, view real estate as a relatively safe investment. They believe that their risk of losses is lower in real estate than in other investments. Many may also have looked at real estate as fairly stable given the economic turmoil of the last while. However, real estate is not immune to massive drops in value and investors in TICs may find themselves with property that is not worth the money they put in it.

The issue is not so much to do with the risk associated with TICs; it is with whether or not investors were made aware of the risks. With some brokers advising that bigger is better, safer and more stable when it comes to real estate (leading some people to invest in TICs because they are more affordable with a number of investors), investors may have believed that TICs could weather any storm.

Many people who purchase tenants in common investments do so on large properties that they could not afford to purchase on their own. That, in itself, seems relatively safe. After all, while one person may not have $1 million to invest in a property, 4 or 5 people can likely come up with that money and then share the profits from renting the space out. Of course, you can only make money off the rent if there is someone willing, and able, to pay it, and with the current economy it is likely that many people and businesses are having trouble making ends meet.

Two other problems with Tenants in Common investments are that they are relatively illiquid and have no active secondary market, meaning that a person cannot get his money out easily. People who cannot withstand loss, or cannot withstand interruptions in cash flow—such as when tenants cannot pay their rent—are likely unsuitable for TIC investments.

Another issue with Tenants in Common is that property values have the potential to drop and can vary depending on the real estate market. Finally, there can be high fees associated with TICs, which can negate any benefits from the tax deferrals.

If brokers did not adequately explain the risks associated with TICs to investors, then those investors may be able to file a claim to recover their lost investments. It is the broker's duty to put the needs of the investor ahead of his own needs (or his own desire for high commissions). If investors were pushed into unsuitable investments, the brokers would have committed a breach of fiduciary duty.