The Risks of Tenant-in-Common Investments

By Roy Schneider, Esq.

Historically, tenant in common (TIC) projects were owned by a relatively small group of investors who knew each other, such as long-time friends, business partners or family members. Strategies to maximize tax savings and preserve equity typically guided investors to this type of structure, rather than creating a limited liability company or partnership to own the property.

In the late 1990s, real estate sales in the form of tax-deferred 1031 exchanges created a new industry. Promoters began soliciting and pooling funds from investors to purchase real estate. Participation in the pool helped investors find replacement property to guarantee their capital gains tax deferment continued.

In 2002, the IRS clarified when this type of pooling is considered a partnership interest as opposed to a TIC interest, a critical distinction for investors using funds from a 1031 exchange transaction. Following that, investments in TIC interests grew considerably due to the numerous advantages. For those who needed a place to invest their 1031 exchange funds quickly, TIC interests provide a relatively simple way to ensure the funds are spent within 180 days of the sale of the previous property, without the hassle of researching, investigating, negotiating and financing a property in less than six months. TIC investors do not have to burden themselves with the day-to-day management of their investment property. Finally, TIC investors can pool their resources to purchase fractional shares of investment-grade property which would otherwise be out of reach.

With all of its advantages, the TIC interest also carries its share of risks. For example, many TIC promoters charged fees that were excessive, or sold the property to the investors for more than it was worth. If property values decline or purchase loans mature, it may be difficult to refinance, forcing the property into foreclosure and taking the entire investment with it.

Other promoters failed to maintain reserve funds separate for each property. If a promoter filed for bankruptcy and did not properly use the reserve funds, TIC investors were left with no recourse and were forced to cover the reserves out of their own pockets or risk losing their investment.

Further risks are caused by the investors themselves and the nature of their relationship to one another – or lack thereof. Owners of TIC typically do not know each other. Decisions regarding TIC governance often require unanimous agreement by all owners, and just one objection can grind the action to a halt. When owners don’t know each other, or are spread across many states, it can be difficult to communicate and obtain a unanimous agreement.

Despite the risks, TIC interests can still be a good place to park your money – but you must be a cautious, diligent purchaser. Visit the property, seek information from sources other than the promoter, and thoroughly evaluate the past and projected financial data. Ask questions and seek the advice of your professional advisors. 

The real estate attorneys at Schneiders & Associates, L.L.P. are available to assist you in the review of proposed investments in TIC projects.

New Lease Rules

Effective July 1, 2013, commercial leases and rental agreements will need to contain a statement by the landlord as to whether the commercial property being leased or rented has undergone an inspection by a Certified Access Specialist. If the property has undergone such an inspection, the disclosure must state whether the property has or has not been determined to meet all applicable statutory construction-related accessibility standards. Civ. Code, § 1938In addition, commencing July 1, 2013, owners of certain commercial buildings are required to disclose to tenants and prospective tenants energy consumption information relating to the building, thus further implementing the Energy Star Benchmarking requirements promulgated as part of AB 1103 and subsequently, AB 531. Specifically commencing July 1, 2013, any commercial building with total gross floor area measuring in excess of 50,000 square feet must disclose energy benchmarking data to tenants leasing the entire building. Commencing on January 1, 2014, this requirement is expanded to include buildings with a total gross floor area measuring in excess of 10,000 square feet, and commencing on July 1, 2014, this requirement is further expanded to include buildings with a total gross floor area measuring at least 5,000 square feet.

Whether you are a landlord or prospective tenant, it is important to make sure your lease not only provides the benefits and protections you require, but that it is fully compliant with all statutes and regulations.  If you would like a review of your lease or assistance in negotiating its terms, contact the real estate attorneys at Schneiders & Associates, L.L.P.

Are You Bound by the Terms of a Letter of Intent ?

By Roy Schneider, Esq.

Complex commercial transactions typically involve a back-and-forth negotiation of numerous terms of the agreement, a process which usually does not occur overnight. Accordingly, parties to a business or real estate purchase or lease transaction often first execute a letter of intent (LOI), which documents the parties’ intent to proceed with the negotiation of a full contract. The LOI includes the essential terms of the agreement, such as closing date and purchase price, and payment terms. However, detailed terms and conditions are reserved for the final, formal purchase agreement.

The LOI, with its brief description of sometimes only the most basic, essential terms, is generally not intended to be a binding contract. However, if it is not properly drafted, the parties could find themselves locked into a binding LOI. For example, the existence of elements required in an enforceable contract, such as the property description, price, closing date and payment terms in the case of  an LOI for the purchase of real property, without expressly declaring the parties’ intent that it be non-binding, could constitute a valid contract.

While parties who enter into an LOI generally intend to consummate the transaction, if the LOI is deemed enforceable as a stand-alone contract, both parties may be subject to undesirable consequences. For example, the LOI often lacks essential contract terms such as indemnity clauses, warranties, financing arrangements, or any other detailed terms necessary to protect one or both parties. To ensure the LOI serves its intended purpose, it must contain a specific provision that states the LOI is intended to be non-binding until such time when a final agreement is executed by the parties.

What if you want parts of the LOI to be binding, regardless of whether the deal is finalized? Perhaps buyers want an enforceable provision stating that the seller will not offer to sell the business or property to others while the parties are in negotiations. A hybrid LOI can be drafted to ensure the negotiations, any confidential information, and final terms are not disclosed. Just as with the provisions stating the LOI is intended to be non-binding, the provisions that are intended to be binding must be carefully drafted to ensure they are enforceable and do not pose unintended consequences for other provisions within the document. A hybrid letter of intent can be a very effective tool in facilitating the purchase of a business or commercial real estate, but care must be taken to ensure it is drafted so that it serves its intended purpose.

The business law attorneys at Schneiders & Associates, L.L.P. can assist you in drafting your LOI so that it clearly reflects your desires and best interests.  If you would like us to assist you in this regard, please give us a call.