Borden on Open Tenancies in Common

Bradley T. Borden (Washburn) has posted Open Tenancies in Common on SSRN.  Here's the abstract:

Tax law (section 1031 in particular) has spawned a new investment vehicle-open tenancies in common. Tax law allows property owners to exchange into like-kind real property tax free, but finding suitable replacement property can be difficult. Real estate syndicators, recognizing a demand for ready-access replacement property, began offering undivided interests in large multi-million-dollar properties to individual investors exchanging out of smaller properties. Those offerings were the first open tenancies in common. Open tenancies in common are distinguished from traditional or close tenancies in common by the size of coowned property, the coowners' mutual lack of acquaintance, and the separation of ownership and management of the property. Open tenancies in common raise issues from several disciplines, including tax; property, business, contract, and, securities law; and economics. To provide the tax benefits investors seek, interests in open tenancies in common must be real property for federal tax purposes. That implicates the tax entity classification rules, which the IRS has addressed with published guidance. Numerous investors coowning a single property raises property law issues, such as rights of possession, rights to revenue, obligations for expenses, and rights to partition. The coowners' lack of acquaintance and disparate background raise business law issues. For example, the coowners may wish to restrict transferability of interests, have governance agreements, and create standards for third-parties who manage the property. Finally, open tenancies in common raise economic concerns and appear to come within the jurisdiction of the securities laws. This Article introduces open tenancies in common to the academic literature, analyzes them, and recommends modifications to the IRS guidance based on property law, business law, and economic and tax theory.

Ben Barros

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