Commercial Real Estate News / Leasing/Renting / 5 Do’s and Don’ts for Co-Tenancy Agreements

5 Do’s and Don’ts for Co-Tenancy Agreements

Published: 04-22-22 Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Leasing. It isn’t late-night infomercial riches, but it sometimes dazzles would-be landlords just the same. Add in the potential to collect rent from multiple commercial real estate tenants, and suddenly there’s a lot more focus on co-tenancy and co-tenancy agreements than normal.

Of course, the post-pandemic era is adding new opportunities, especially in the retail space. Co-tenancy agreements aren’t anything new, but they are coming back in fashion, just like other commercial real estate patterns.

There are specific do’s and don’ts to keep in mind to make co-tenancy agreements have the greatest chances of working for you and not against you.

#1 – Do Consider the Advantages of Co-Tenancy

One of the key advantages is that co-tenancy agreements can cover a wide range of commercial properties and gain access to properties far above an individuals’ means.

Big retail spaces aren’t known for being affordable, but they can be huge income generators, benefiting the entire group as large.

If the group needs to do 1031 exchanges at any point, co-tenancy agreements can also play into that strategy.

These agreements are nearly infinitely flexible, as the agreement can be modified at any time as long as all parties are in agreement. Owners can split their interests down to accommodate new individuals that want to join the group. It can also apply to more than one property at one time.

#2 – Don’t Overlook the Worst-Case Scenarios

What happens when one of the tenants in common passes away without an heir? It’s a much more common situation than you might imagine. Indeed, according to AARP, 60% of U.S. adults today have no will or estate planning process.

In the case of co-tenancy agreements, when a tenant in common dies without having any designated heir, the issue can go right into probate court. This creates additional delays.

Yet death isn’t the only scenario to consider here. What happens if someone shares their interest with a stranger? If this is a group of friends that are gathering forces, it can not only feel like a betrayal, but there might not always be legal recourse for this.

#3 – Do Consider the Right Business Structure

The right business structure can certainly make a difference in the co-tenancy agreement sense since it provides a way to divide things cleanly and clearly.

For example, an LLC is ideal because the agreement would be with the LLC at the center, and every member has equal shares in the LLC. This makes things much easier in the grand scheme of things.

#4 – Don’t Skip Qualified Professional Advice

Co-tenancy agreements for tenants-in-common situations are more complex than meets the eye. At the very beginning, it feels silly to get any type of legal professional involved because everyone agrees.

However, there are tax and legal consequences that must be addressed.

Getting an attorney specializing in working within this commercial real estate segment is a good idea.

A CPA is a great fit for this type of work since they have more specialized knowledge than a regular accountant. They can also represent companies and individuals before the IRS, which may come in handy at another time.

#5 – Do Have an Exit Strategy

One of the most commonly overlooked things about co-tenancy agreements is not having a good exit strategy. Generally speaking, there are only two ways to dissolve the TIC agreement: buying other people out or selling the property.

Selling the property has to be pretty unanimous to go smoothly. So if someone wants to hold out, it will cause additional legal legwork and time to have the sale go through.

From the beginning, all of the members of the co-tenancy agreement should have a clear understanding of the exit strategy. If the goal is to sell the property, this needs to be stated upfront. What would cause a sale to become a red light situation rather than a green light one?

Your Co-Tenancy Agreement Checklist

Hitting the ground running with co-tenancy agreements isn’t difficult, but it does require making sure that all of the pieces fit together.

Here’s a summary to get you well on your way:

Understand from the beginning who will be involved, what shares they’ll own, and what the agreement will look like.
Taking plenty of time on the co-tenancy agreement sets the foundation for everything else. Having the right business structure in place makes it even easier to control ownership issues.
Double-check if all owners have estate planning in place, and address this at the beginning just in case.
Look for the right retail property that would lend itself well to the co-tenancy setup; take your time to reach a consensus.
Keep up on all paperwork, especially considering that more financing is involved in co-tenancy than buying things as an individual or even as a one-member LLC.
Crunch the numbers and take extra time with the analysis; there are more moving parts than you think.

How well do you know the people that you want to partner with? It cannot be stressed enough that it’s important to be able to work things out amongst the members.

Never Rush Anything Regarding Co-Tenancy

You want to have a good idea of anyone you do business with, but co-tenancy can have serious legal issues when not done properly.

The focus on getting deals can sometimes overshadow the need to be prudent with co-tenancy agreements.

That doesn’t mean that tenants-in-common is a bad structure; merely that extra caution is required.

There is no way to eliminate all risks in commercial real estate, but mitigating and understanding the risks involved will lead to better deals.

List & Browse Commercial Real Estate for Free on MyEListing.com!

You can list and browse commercial real estate for free right here on MyEListing.com by signing up for a free account. You’ll also get unlimited access to accurate local market intelligence, customized property type alerts, demographics reports, comp software, and more.