I am writing this article as a reminder that methods of holding ownership interest in real property are distinctly different. I recently received a solicitation from a mortgage broker for an available trust deed investment advertising 6 condominiums that the owner had converted from a standalone 6-unit apartment into a 6-unit tenant-in-common legal holding structure. There is a difference between a condo and a tenant-in-common. The mortgage broker was engaging in false advertising while representing them as condos. Lack of knowledge is no excuse for the potential problems created by the broker should an investor purchase a portion of a trust deed investment and later discover this material misrepresentation.
In the above example a certified general license appraiser appraised the 6-unit building erred in her classification of the property. In one section she describes the property as a “6-unit condo, therefore, each owner owns 16.67%.” In another section she states, “subject was converted from a 6-unit building to a 6-unit TIC, Date of conversion: xx date 2019.” A tenant-in-common property cannot be used as a comparable for a condominium even with similar physical characteristics.
Let’s review the types of Common Interest Development (CID). This is a real property that contains multiple property owners who share a common set of ownership rights, financial obligations, property and easements rights as established in a set of recorded rules and restrictions (referred to as Covenants, Conditions, and Restrictions-CC&Rs)
CIDs may be developed and structured in numerous ways based upon the desire of ownership and occupancy composition. Examples are found in high-rises, mixed-use buildings, senior communities, golf course developments, equestrian, commercial buildings including office, retail, industrial, storage and flex space.
Regulations for CIDs are defined under the Davis-Sterling Act which is referenced in California Civil Code 4100. Additionally, the Subdivided Lands Act- 11000-11200 of the California Business and Professions Code applies. Below are forms of CIDs.
- Community Apartment Project provides the multiple fee owners with an undivided ownership interest in the entire project and allows for tenant occupants as non-owners to have exclusive rights to rent/lease individual apartments within the project. Title of the property may be held individually, in a partnership, limited liability company, corporation, REIT, etc.
- Condominium Project provides each property owner with an undivided ownership of a portion of the project usually referred to as a common area, and individual fee ownership interest in the physical space called a condominium. The condominium space is the airspace within the interior of the individual unit from the floor to the ceiling and wall to wall. Designated location of ownerships is described on the recorded final map, parcel map, or condominium plan in enough detail to locate the boundaries of the unit. Areas within the development may be filled with air, earth, water, or fixtures, or any combination thereof, and may not be physically attached to the land except by easements for access and support. The individual unit will be purchased usually by an owner or group of owners.The common area, land, building and appurtenances will be owned by a mutual-benefit nonprofit or membership corporation through the use of a Homeowners Association (HOA), Cooperative agreement, maintenance agreement or other types of agreements, all with the same purpose to identify the rules and regulations for the multi-owner use of the property. Condos are classified as real property, meaning that the buyers own the deed of the dwelling unit. In the case of a row house, townhouse or multi-unit single family design, the individual owners may own the dirt directly beneath the footings of the individual unit as opposed to condominiums that only own the interior “airspace.” Purchasers of each unit will own the condo outright, subject to conditions such as a loan, government rights, and covenants, conditions and restrictions.
The fee owner will own the individual airspace contained within the walls of the separate unit. The owners of the individual airspace or individual unit will also own shares in a mutual-benefit nonprofit corporation referred to as the Association that contains the physical common areas of the property. These may include hallways, walkways, laundry rooms, workout rooms, pool, common utilities, amenities, HVAC systems, elevators, and so on. Owners will elect a management board of directors to oversee all aspects and management decisions of the association.
Condominium units may be residential, commercial, industrial, retail, office, mini-storage, and function similarly. Association dues will be estimated and billed to the individual owners prorated to their ownership percentages. A management team will be hired to take care of the maintenance, utilities, insurance, capital improvements, upkeep and payments of same. An association of owners will elect a management board of directors to oversee all aspects as well as management decisions of the association.
When an owner desires to sell and convey title to a new owner, the new owner will take title subject to all the provisions contained in the master condominium recorded documents. Each Condo has a separate and distinct legal description and an Assessor’s Parcel Number (APN). Also, each state within the USA has specific laws that cover requirements for condominiums.
- Planned Unit Development (PUD) is commonly utilized for single-family home communities. Fee owners have title to the individual units. A PUD has either or both the following: (a) common area that is owned by the association or by the property owners in common, and/or (b) common area and an association that maintains the common area with the power to levy and collect assessments. Owners of the association will own as tenants-in-common.
- Stock Cooperative (Co-op) This is a CID in which a corporation is formed for the purpose of owning the entire project/development. Owners purchase shares in the corporation as “shareholders” and receive a lease type of right to exclusive occupancy in a portion of the development (a unit).The owners of the co-op’s units will purchase them subject to an agreement of exclusive occupy of a certain unit, one or more, but without fee ownership of the individual unit. Ownership of co-ops are not considered as real property, but rather as shareholders of a corporation who owns the property. They are not fee owners.
If an owner wants to finance the purchase of a co-op, he/she would need to take out a “share loan” instead of a “trust deed or mortgage” loan. This loan is not directly secured by a lien on real property. It is a personal property loan from a bank or institution based upon the borrower’s financial condition rather than the property. The lender will take an assignment of the corporate shares and the occupancy agreement held by the owner of the unit. However, a lender may not rely on normal real property foreclosure laws. They would rely upon the Uniform Commercial Code regulations to foreclose on personal property.
Co-ops have master associations which are responsible for all the payments relating to the management and maintenance. Co-cop residents are responsible for paying a pro-rata share of the costs of running the operation. The dues are usually paid monthly and may rise as the cost of goods and services rise.
When an owner wants to convey title, they are not conveying an interest in real property, but are conveying an interest in personal property like selling corporate stock.
- Tenant-in-common (TIC) ownership is also referred to as community apartment.This refers to a form of ownership/development in which an undivided interest in real and personal property is coupled with the right of exclusive occupancy of any apartment located therein (Calif Civil Code 4105). Two or more parties share a fractional ownership of the entire property. Each fractional share may vary as a percentage of the whole. Tenant-in-common ownership does not have the right of survivor ship among co-owners, like joint tenancy. A joint tenancy allows the parties to own the property equally, and upon the death of one owner, the title passes automatically to the owner’s survivors. The tenant-in-common property of a deceased owner will be passed on to the decedent’s beneficiaries subject to his/her estate planning directions
Each tenant-in-common owner has a right to unrestricted access to the entire property, regardless of the percentage that each owns. Each co-owner has the responsibility of paying the cost relating to the upkeep, taxes, maintenance, capital improvements, and management.
Tenancy-in-common ownership should be subject to a well drafted partnership agreement relating to the interest and rights of each party. A tenancy-in-common agreement or a partnership agreement allows multiple parties to share an interest in the real and possibly personal property attached while retaining a lot of the freedoms that can be restricted in a joint tenancy agreement. There exists a large difference in the complexities of ownership between one that does and does not have a well written form of partnership agreement. A written agreement will memorialize the rights and responsibilities of each party so that conflicts are more easily managed. The agreement will provide for each party to sell their fractional ownership interest.
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