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6 Essential Provisions for your next Tenant in Common Agreement - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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Hey, what's up guys
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It's Clint Coons here.
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And in this video, we're going to talk
about six essential provisions
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for every tenant and common agreement
you're going to be put in together
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with fellow real estate investors.
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Okay, let's get started.
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All right. Now, what is a tenant
in common agreement to begin with?
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Why are even watching this video?
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Well, I have another video on tenant
in common agreements, tick agreements.
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While they're so important,
check the show notes.
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I've got a link in there to that video.
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But to give you a high level,
what is a tick agreement?
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A tick agreement is
is basically a joint venture between
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two property, two investors
or more that have
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a vested interest or an ownership interest
in the underlying asset.
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So if I went into a tick agreement
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with another investor here to do this
deal, right, we could structure it
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if it supposed to be 7030, I would own
a 70% interest in the property.
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This person would own
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a 30% interest in the property
and he gets recorded on title that way.
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That's how the property would be
deeded to Clint and to investor Clint.
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As to 70%, investor as to 30%.
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So the reason why people find this an
attractive way of putting deals together
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is because every person is vested
in the property that is, every person's
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part of this deal is going to be vested
into the deal itself.
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So one party couldn't
do something without the knowledge
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or the consent of the
the other individual.
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When I mean by do something,
I mean like sell the property.
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So when you put one of these
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deals together and you're putting together
a tenant in common agreement,
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what you're doing is
you're taking title a certain way,
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but then you're recording a tick agreement
also against the property.
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So, you know, title would have my name
and the investor name on it.
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But then me and this investor have agreed
how this is
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this arrangement is going to work out
between the two of us.
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It's a contract between the two of us.
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So that contract
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that we determine what the terms are gets
recorded on the property.
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So everyone else knows
how this relationship is working out.
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Now, here's where the six essential
provisions come in.
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And these are extremely important.
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If you're going to enter
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into this agreement, it's
where you should put a lot of your focus.
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And it's not all of them. It's
not an exhaustive list.
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But there are six areas
where I tell people all the time, Hey,
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I want to check these out
before we go any further into this
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tick agreement
to make sure the expectations are met.
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Now, what is the first one?
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The first one is
you want to ensure that there's
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no right okay to partition
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the property.
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What does that mean?
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Now, this is so crucial
and that's why I put it at number one.
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It ensures that one of these tenants
right here, or if there are three
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or four or whatever, one of those people
cannot screw up your real estate deal.
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Let's face it, as real estate investors,
we have expectations.
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Yeah, I would like that deal
to get into the property, get it rehabbed,
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get it sold within three, four,
six months.
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But things come up, you know,
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it is you get you start
working on the property like,
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oh wow, I didn't know we had this problem
there.
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Now got to fix that.
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And so things get delayed.
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Can't get contractors
out, can't get materials.
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So this is a snowball effect.
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What should have been done in six
and now eight, nine a year,
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year out, you get an investor
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now that gets a little squirrely like,
oh no, I can't wait.
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I want my money back now.
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I don't trust where this is going.
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So here's what they can do.
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If you don't have
this partition agreement in place,
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what are those tenants right here?
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Let's say this guy right
here wants to get out.
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He can force the sale of the property.
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I've done it before with individuals.
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What we do is we go to court
and we say, Hey,
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Your Honor,
we'd like to accurately partition
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that property, which means cut it up
based upon our percentage ownership.
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And this guy owns 40%
and this one's own 60%.
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What do you cut a house at 40% and say,
here you go,
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what did you the 40% or whatever
your ownership
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interest is, we'll just take a chainsaw
right down the middle.
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That doesn't work that way.
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Courts are going to say, hey,
we cannot equally divide this property up.
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Therefore, since we can't equally divided,
we have to sell it.
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And so this individual that's
sitting over here realizes all sudden
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they realize, hey, this property's
being sold and I can't stop it.
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I'm not getting the value out of this
that I anticipated a title,
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my money up and this guy
pulled the rug out from underneath me.
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That is why
you need to state in your agreement.
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No tenant may partition this property,
move for a partition action.
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So that stops them from doing this.
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That's why I put it at number one.
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Now, number two. Okay.
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And so a lot of these can, you know,
they get two threes.
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Threes can be twos,
twos can be fours maybe.
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But no more than that is management.
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Okay.
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Who is going to manage the deal?
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So in this tenant in common agreement,
you're going to specify
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who's in control of the asset,
who can make all the decisions.
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Now, this is what's key.
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If I'm going into a tenant
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in common agreement with someone
who doesn't have any experience
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when it comes to investing,
the last thing I want is this person
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who's never flipped
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a property for never made an investment
before to start dictating
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what we're going to be doing.
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They walk into the property,
you know the way it is.
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You're doing a rehab and they walk in
and they say, You know what,
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I think we need to go higher end on that.
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Like, No, I'm here to make money, okay?
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This isn't about what you would like.
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It's about what these buyers will accept
and what will how we will
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maximize the return on the investment
so that can happen.
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So you want to make sure is that
all of the decision making with respect
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to that investment in a new enumerate
what those things are just to be crystal
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clear are left to the person
who is managing the project.
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Now maybe this isn't a flip.
Maybe it's a longer term hold.
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Again, who's going to manage the project
you specify in there?
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So that keeps busybodies
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out of the business that these individuals
don't have any knowledge.
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So I think that's really important
when it when it comes to doing this.
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All right.
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The second thing
we want to have, our third thing
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we want to have on here is capital calls.
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All right.
That's really important as well.
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Now, what is it?
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What do we mean by capital call?
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Let's assume that we get involved
in this project in some unknown
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issue comes up
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and we need an extra $40,000
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where you want to make sure you specify
in this tenant in common agreement
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that each member agrees
to meet the capital calls
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that are determined
based upon you enumerate out
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the fact maybe the manager
can make the capital call
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that that's required
in order to put the deal together.
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And so that means you have to contribute
more money to the deal.
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So if you bring in a partner here
and you need extra $40,000,
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this guy is going to be responsible
for contributing 16
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K, 40% of 40 is $16,000.
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So if he doesn't contribute the money
well, what happens?
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Either the deal's going to get stalled
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or you're going to have to make up
the difference.
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Well, if I want the deal
to keep progressing the course,
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if I have the cash, I'm going to come in
and make up the difference.
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But if I make up that difference,
then there's got to be some penalty
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for this individual on the backend
for not meeting the capital call.
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So you put in their provision
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that all members must meet
their capital calls within 30 days
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of the
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capital call going out to the tenant
and common members.
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This keeps the project moving ahead
and it also ensures that those people
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that make those capital calls
on behalf of the other members,
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you can specify how
they are going to be compensated for that.
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And typically it could be a reduction
in their their overall proceeds
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they receive at closing or however you
whatever that project looks like.
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All right.
So that's number three.
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Number four, yeah.
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This is responsibilities
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of the tenants.
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What do I mean by that?
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Well, sometimes when you put these things
together, you you you're going to specify
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that each tenant, if this is the case,
what is is required to do certain things.
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So if I was going to go into a tenant
common agreement with another investor
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and one person
was going to take on permitting,
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the other one was going to take
on handling the contractors.
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If that's what you decide to do between
the tenants, you're going to split up
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the overall decision making or actually
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responsibilities, and you need to outline
those in your tenant in common agreement.
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So it's crystal clear who is responsible
for which aspect of that project.
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So you want to make sure
you get that in there.
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The fifth one that I would put on there is
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I can't go on loans.
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All right.
So so here's another issue that comes up.
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Let's assume that we're in this deal
and we need to
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either we want to do a cash out refi.
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We need to go get more money
for the rehab work
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that's going on because we decided
to change the scope of the project.
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And so we need to borrow $100,000.
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Well, it's going to be really hard
to get a lender to loan you money
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unless both tenants agree to go on
that loan.
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They're not going to say,
all right, I'm going to loan you $100,000,
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but it's only going to attach to this 60%
here.
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And Clint's going to be
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the one that has to offer up his credit
and he'll be the one qualifying for
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the loan.
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Not going to happen most of the times.
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They're going to want both tenants.
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Both tenants
have to agree to encumber the real estate
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because they want to exceed
100,000 across the entire property.
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Therefore,
you have to have a provision here
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that each tenant agrees to go on the loan.
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Now, what happens
if one of them doesn't work?
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They don't go on the loan.
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You can't get the project to completion
and over the finish line.
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Well, then there's damages there.
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So that would then give you the right
to sue that person
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for holding up their project
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and not meeting their obligations
under that tenant in common agreement.
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So I would specify in my agreements
that if there's lending involve
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or it's anticipated
that each tenant agrees
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to go on the loan, or at least go
through the lending procedure
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and try to get qualified,
of course, to be on there.
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But they just can't step back, say,
no, I'm not going to do this.
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All right.
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The sixth item that I think is
really important is called right.
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Okay.
Right of first refusal.
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Right? Right of first refusal.
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So what that means
is that if any tenant wants out of a deal,
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then if they're going to try
to sell their interest
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and believe me,
it's kind of hard to sell these interests.
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If you did want to get out.
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But let's assume that they found
somebody who's willing to buy it.
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Well, the last thing we want to do
is put you into a an arrangement,
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basically, like a partnership
with someone else that you don't know
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and you have to answer to them
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or they have certain responsibilities
they agreed to take on.
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So if you want to prevent
that from occurring, then
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you better have inside of your agreement
a right of first refusal, which means this
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if this guy wants out of the deal
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and he wants to sell it
and he's found a willing buyer,
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and we know that
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there's a firm offer on the table,
it has to be presented to you first.
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So you have the ability
to match that offer to come in,
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step into that buyer's
shoes and close on the buyout.
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His interest
and you can specify the buyout terms.
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You could specify that if
with my right of first refusal
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that I'll meet whatever bona fide offer
you have, it's 20% down.
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The rest is going to be financed at
80 months, unsecured, three months, I say
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20 months
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unsecured and therefore you can
then purchase that interest.
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And so you've got to be thinking about
that as well.
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When you put together
that right of first refusal,
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what does that payout
look like to that other party
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so that you don't have to come up
with gobs of cash?
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I mean, let's assume that their interest
is valued at $800,000.
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When you've got $200,000
lying around, it's
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going to be hard to get a loan against it.
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So but you could float that
for five years.
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So we're going to build in a 60 month loan
with 10% down unsecured
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or possibly secured against the property
right of first refusal crucial
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to ensure that you don't end up
in a ownership scenario with someone
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you have no idea what their background is
or their understanding of real estate.
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So those are my top six
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provisions that need to be in a tenant
in common agreement.
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If you're going to go down this road,
I think they're great.
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I really like tenant common agreements.
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Make sure you're working with an attorney
that understands this stuff,
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has put these deals together before.
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And Anderson, we've done this.
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We work with investors
who put these together.
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You can sign up for a free strategy
session if you want to learn more,
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check out the show show notes there.
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I've got a link if you want to sign up
for a strategy session to discuss
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whether or not a tenant
common agreement may be right for you.
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All right, guys, that was tenant common
agreements in most essential provisions.
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Hope you found a lot out of that.
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And be sure to subscribe the channel
if you're not already a subscriber.
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Take care.
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