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