One Partner In A TIC Defaults, The Other Paid Cash: What Happens
Pulled from the intertubes:
“Does anyone have experience with a client who bought into a 2 unit TIC and paid all cash and the partner had a loan? In particular, what type of legal protection did they get in case of loan default by the mortgaged TIC partner.
It should be covered under the TIC agreement, allowing one partner to force a sale in the case of default.
I have no experience with this exactly but have been through quite a bit on the TIC front.
My thoughts are as follows:
If the loan is fractional and the all cash buyer’s name is not on it .. then, of course, there is no liability. The buyer becomes a co-tenant with the bank.
If the all cash buyer is on the loan then his/her credit will get slammed .. and a foreclosure would be on the whole property (including their interest). That is why the TIC agreement enables the all cash buyer to use reserve fund to pay the mortgage, then foreclose on the co-tenant and sell the interest. The bank may or may not allow them to assume the loan during this bridge period .. the bank may (perhaps) not find out for a while.
Again, this is my opinion .. no experience in the matter and I have, no doubt missed a few things.
There would have to be a default fund, which is usually 6 months worth of payments. The TIC agreement by Sirkin has that built in as well as remedy for default by a partner.
I sold a 2unit bldg recently where there was a big discrepancy in the loan amounts for each partner, maybe the situation is analogous to yours, and I think the TIC agreement itself (Sirkin) spelled out that any default on the loan payments by one partner which might jeopardize the bldg or put at risk of foreclosure, etc., triggers a sequence of options including buy-out, forced sale, etc, which protects the other partner. I think those protections would apply even if the all-cash partner was not on the loan at all.”