The trouble with tenancy-in-common

Flatiron Building is latest casualty of obscure ownership structure

The Flatiron Building
The Flatiron Building (Illustration by The Real Deal with Getty)

The owners of the Flatiron Building were at an impasse, and it was costing them hundreds of thousands of dollars each month.

They could not agree on the landmarked tower’s future, and its present was bleak — it had been vacant since 2019, when its sole tenant, Macmillan Publishers, moved out. 

The deadlock led to an auction, at which an outsider swooped in with a winning bid. The outcome remains uncertain, but the episode underscored the risk of the building’s outdated form of ownership.

Known as tenancy-in-common, it gives multiple owners of a building equal control over it, no matter the size of their stake. The arrangements vary, but the same factors turn many of these marriages into unhappy unions.

In the case of the iconically wedge-shaped Flatiron Building, one owner proposed partitioning it, which did not sit well with the others. “A vertical or lateral bisection of the property is completely impractical, and would destroy its marketability,” one of the owners, GFP Real Estate’s Jeffrey Gural, said in court documents.

The winner of the auction for the Beaux-Arts building, Jacob Garlick, did not follow up his $190 million bid with the required $19 million deposit Friday. That gives a group of owners led by Gural the option to purchase the property at their last bid of $189.5 million, although Gural told The Real Deal that he will not exercise it. Another auction is likely.

A tenancy-in-common is often a family affair: When a stakeholder dies, their share in the building goes to their designated heirs.

That means some owners can suddenly find themselves tethered to someone with whom they do not get along. In some cases, any owner can also go to court to force a sale of the entire building.

Gural and like-minded owners have a 75 percent stake in the iconic building. They sued to force the auction after clashing with the 25 percent owner Nathan Silverstein, he of the partition strategy.

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“You don’t have to have a reason to want to partition,” said Janice Mac Avoy, a partner at Fried Frank’s real estate department. “That’s a pretty powerful tool.”

Like much else in the real estate industry, one person’s headache is another’s opportunity. For potential buyers, the TIC structure can allow them to take control of a property with difficult owners. Extell Development’s Gary Barnett famously took over 14 Midtown buildings known as the Ring portfolio in part by purchasing stakes in them and forcing partition sales.

TICs are far less common now. Investors prefer limited liability companies or limited partnerships, said Richard Dolan, who represented Extell on the Ring properties and the majority owners in the Flatiron case.

“In investment property, it is a very unwieldy thing,” he said. “You tend to only see it as a legacy of something that was seen long ago.”

Newer tenancy-in-common structures have been modernized to include provisions to waive owners’ ability to force a sale, Mac Avoy said.

Such provisions are necessary for owners of TIC properties to defer capital gains taxes on their sale by immediately investing proceeds from one asset sale into another. Most TICs are now structured with these 1031 exchanges in mind, said Louis Tuchman, partner and chair of Herrick’s tax department.

Generally, owners can sell their stake or borrow against it without permission from the other owners, though finding a lender to provide such financing can be challenging. 

But even modern TICs come with risks. Because each owner is considered a direct owner, they can act independently, hurting the other owners. Different ownership structures do a better job shielding a property from the whims of a rogue owner, Tuchman said.  

“By and large, there is an algorithm by which you make decisions about the property,” he said.
“Although somebody could get into financial trouble, they can’t encumber the property directly.” 

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