The distinctions between Tenant In Common and Delaware Statutory Trust.

Tenant In Common
vs
Delaware Statutory Trust

The terms, “Tenant In Common” and “Delaware Statutory Trust”, frequently top the search results when investors hunt for suitable investment entities. After all, what are the distinctions between the two?

In order to carry out a profitable investment plan, it is important to understand some key features that each of the two can offer.

TENANT IN COMMON

Tenant In Common (TIC) is an arrangement where multiple people can share ownership rights in a commercial or residential property. The legal force behind TIC varies state by state, but there is a high degree of consistency regarding its usual configuration. Generally speaking, a tenant usually refers to a person who rents or leases a piece of property. However, in the context of TIC, tenants are construed as owners of the property. The percentage of the property’s ownership among tenants under TIC can have substantial differences. Even though one tenant might have a smaller ownership share compared to the others, it does not necessarily mean that he or she has less right to access or utilize the property. The tenants’ individual financial contributions, interests, and responsibilities upon the property are laid out in a Deed of Trust (also known as a Declaration of Trust). Although it is not legally required, it is highly advised to be written out just so that the consensus among the tenants can be manifested and predetermined procedures and obligations for various situations can be discerned and followed in case of future disputes.

In relation to property sale, since all tenants collectively hold the ownership of the property, it requires all the parties’ signatures on the transfer deed. Of course, each tenant has the freedom to sell off his or her share to anyone else. It does not require approval from other tenants. However, if one tenant wants to sell the TIC property entirely, then every tenant has to agree. In the exceptional case that the concurrence failed to form among all the tenants, the tenants who insist to sell the property entirely can force a partition action through the court. This is indeed a costly path, however, the court can either physically split the property proportionally, if possible, based on the ownership share of each tenant or force the property sale and all the tenants take their fair share from the proceeds.

In the case of a tenant’s death, a property owned under Tenant In Common will be passed on to his or her estate, with respect to the share he or she owns. Hence, it is important for the tenant to designate a person or entity in a will to whom the share will be passed upon his or her death.

Although property owners under Tenant In Common can vary their own percentage of the property’s total share in the TIC agreement, the property is not legally divided for the purpose of taxation. Thus, each party will not receive their own proportional property tax bill, but instead a single property tax bill. It is critical to be aware that Tenant In Common is not a separate legal entity. Therefore, it is worth noting that in relation to debts and property tax, parties in TIC bear joint and several liability in many jurisdictions. In other words, joint and several liability allows the tax authority to chase after any tenants in the TIC at its discretion for the full amount of owed tax. For example, assume that A, B, and C own a piece of property under their Tenant In Common. There is a sum of property tax owed. The tax agencies can sue A alone for the full amount of owed tax. A, then, will have the right to sue B and C to disburse their fair shares of property tax in accordance with the Tenant In Common agreement.

DELAWARE STATUTORY TRUST

Under Delaware Statutory Trust (DST), the trust would be the sole party of the property ownership due to its separate legal personality. Namely, the trust holds the title of the property, whereas in TIC, the title of ownership is shared by multiple parties. In general, a single party obtaining a loan on a property is more efficient and considerably less expensive than several parties to do so. From the lender’s perspective, offering a loan on properties owned by TIC is much less attractive than by DST. Logically, having up to 35 borrowers in TIC for a single property is considerably troublesome for a lender, because each TIC investor requires underwriting and monitoring. 

On the other hand, since the DST is the sole party of ownership, its beneficial owners in principle cannot participate in major decisions regarding the property – for example when it is sold. The signatory trustee, who is typically appointed by the DST owners, is in charge of making those decisions. Such limitation on investors would not happen in TIC ownership, since all the tenants are the parties in the property title. However, every decision regarding the TIC property will have to acquire consensus among all the tenants which can be difficult to obtain.

Contrary to the joint and several liability of Tenant In Common, DST enjoys limited liability due to its bankruptcy-remote provision. Because DST has its own separate legal personality, investors’ personal assets are shielded from the trust’s debts. In other words, according to the governing document, any creditors of the trust can seize or collect debts solely within the ambit of the DST. On the other hand, the Delaware Statutory Trust Act (see 12 §§ 3805(b)) provides that “no creditor of the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust”. This statutory footing maximizes the protection over investors’ properties within their DST from their own personal business affairs and debts. Arguably, the beneficial owners may participate in management, or effectively control the statutory trust by directing the trustees, without taking on any personal liability (see 12 §§ 3806(a)). This arrangement should indeed be put in the governing document of the DST for the purpose of clarification.
In addition, the interests distributed on a regular basis to the beneficial owners upon the DST’s investment rely on the DST’s separate legal personality as well. It creates two captivating effects:

 As long as the existence of DST continues, the interests generated from the DST’s properties will never cease. Hence, it can live on forever in theory;

 Again, each beneficial owner’s personal affairs, such as debts, equity interests, death, bankruptcy, or dissolution have no effect whatsoever on the DST.

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