Fractional Ownership of a Building With Your Own Deed
A tenancy in common gives each investor an undivided fractional interest in a specific property, held directly rather than through a company. That direct ownership is what makes it useful and what makes it awkward.
Owning a Fraction Directly
Most fractional property investment runs through an entity. Investors hold shares in a company or interests in a partnership, and that entity owns the building.
A tenancy in common works differently. Each investor holds an undivided fractional interest in the property itself, on the deed, as a direct owner. A holder with a ten percent interest owns ten percent of every square foot rather than a specific portion.
The interest is real property. It can be sold, mortgaged, and inherited, and it passes through an estate as property rather than as a security.
Why That Distinction Matters
The direct ownership feature has one consequence that drives most of the market.
A like kind exchange under section 1031 permits an investor to defer capital gains tax by exchanging investment real property for other investment real property. Crucially, an interest in a partnership or company holding real estate does not qualify. It must be real property.
An investor selling an appreciated building, facing a substantial gain, and needing to identify replacement property within strict deadlines therefore cannot simply buy into a property fund. A tenancy in common interest qualifies where a fund interest does not.
| Partnership or Company Interest | Tenancy in Common | |
|---|---|---|
| What is owned | An interest in an entity | Real property directly |
| Qualifies for like kind exchange | No | Yes |
| Decision making | Governed by the agreement | Frequently requires unanimity |
| Financing | Entity borrows | Every owner must sign |
The entire structure exists because tax law distinguishes between owning property and owning a company that owns property. That distinction produces a form of co ownership nobody would design from scratch.
The Governance Problem
Direct co ownership creates practical difficulties that entity ownership solves.
Under general property law, each co tenant has rights over the whole property. Major decisions, including selling, refinancing, and sometimes leasing, typically require unanimous consent under the co ownership agreement.
With a handful of owners that is manageable. With thirty five, which was the practical maximum under tax authority guidance, a single holdout can block a sale the other thirty four want.
Lenders find it equally awkward, since a mortgage requires every owner to sign and every owner to be underwritten, and a default by one complicates enforcement against the whole.
The structure also carries a serious latent risk: any co tenant can generally seek a partition, asking a court to divide or sell the property. Co ownership agreements waive that right, and the waivers are not always enforceable.
The Delaware Statutory Trust Alternative
Those difficulties produced a successor structure that now dominates the market.
A Delaware statutory trust holds the property, and investors hold beneficial interests in the trust. Tax authority guidance confirmed that a beneficial interest in such a trust, structured within defined limits, is treated as an interest in real property for like kind exchange purposes.
The trust removes the governance problem entirely. A trustee makes decisions, no investor consent is required, and the lender deals with one borrower.
The price is rigidity. The guidance imposes restrictions frequently called the seven deadly sins, prohibiting the trust from renegotiating leases, refinancing debt, reinvesting proceeds, or making anything beyond minor capital improvements. A trust that needs to act outside those limits must first convert to a limited liability company, which terminates the tax treatment for future exchanges.
That rigidity means these vehicles suit stabilised, long leased, single tenant properties with predictable cash flow and no likely need for active management.
Where the Investor Risk Sits
Both structures are sold substantially to individual investors under time pressure, which is the underlying consumer protection concern.
An investor who has sold a property has forty five days to identify replacement property and one hundred and eighty to close. That deadline is unforgiving, and it produces buyers making a substantial commitment quickly on a property they did not select.
Sponsors charge upfront fees, load, and ongoing management fees, and the returns quoted are frequently before those costs. Secondary liquidity is minimal, so an investor who wants out before the sponsor sells has few options.
The tax deferral is real, and the underwriting discipline available to a buyer with six weeks and a hard deadline is not.
The Bottom Line
Tenancy in common ownership exists because tax law treats owning property differently from owning a company that owns property, and that distinction is what permits an exchange to defer a large gain. Its governance problems drove the market toward the Delaware statutory trust, which removed the decision making difficulty by removing decision making entirely. Both are bought under a statutory deadline that compresses diligence, which is the risk that matters more than any feature of the structure itself.