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Tenants in Common Agreement


AGREEMENT MADE and entered as of the *DAY *MONTH, *YEAR, by and between *OWNER1, an individual who resides at *OWNER1-ADDRESS ("OWNER1"), and *OWNER2, an individual who resides at *OWNER2-ADDRESS, ("*OWNER2") (referred to collectively as the "Investors").

W I T N E S S E T H :

In consideration of the mutual covenants set forth herein, and intending to be legally bound and for other good and valuable consideration, the parties hereto hereby agree as follows:

Article I - The Investment

Section 1.1 *OWNER1 and *OWNER2 have entered into an arrangement as tenants-in-common (the "Investment") for the limited purposes and scope set forth herein. The Investors intend this Agreement to govern their Investment from the date of inception *DAY *MONTH, *YEAR [** often this is the date of the Deed]. The business and affairs of the Investment shall be conducted solely under the name of the Investors as tenants-in-common. [** At the outset, consider who the investors are. Estate planning considerations could be important. For example, if most assets are in one spouse's name, it may be preferable for the investment to be taken in the name of the other spouse to enable that spouse's estate to take some advantage of its unified credit. In some instances, it may be preferable for a child or spouse to take title to the property. [Talk to your lawyer about using a limited liability company.] If one of the Investors is a dealer in real estate, a new entity should be used to acquire the property to avoid dealer taint so that if capital gains are reinstated, the Investors, or at least one, can qualify.].

Section 1.2 The rights and obligations of the Investors and the administration and termination of the Investment shall be governed by the laws of the State of *STATE-NAME.

Section 1.3 The purpose of the Investment is to acquire as tenants-in-common, a single family residence located at *PROPERTY-ADDRESS, as more fully described in Exhibit A attached hereto [** Attach a complete legal description as Exhibit A. Consider what property is being acquired. Note that land improvements such as sidewalks, driveways, etc. can be depreciated over a 15-year period on an accelerated basis, certain furniture and fixtures may qualify for a seven-year accelerated depreciation period. This contrasts favorably with the longer period required for residential and non-residential real estate respectively. Careful analysis of what assets are being acquired in both this description and in the Contract of Sale, can generate valuable tax benefits.] (the "Property"), and to lease, maintain, mortgage, own and sell, and convey real and personal property, including the Property (the "Business"). [** If the property is already owned by one of the Investors and that Investor is contributing the property to a partnership of the two investors, special tax consideration may be triggered where the property has a tax basis to the Investor which differs from the fair market value of the property on the date it was contributed to the partnership.].

Section 1.4 Except for the rights of the Investors as set forth herein, nothing in this Agreement shall be deemed to restrict in any way the freedom of either Investor to conduct any other business or activity whatsoever at any location.

Section 1.5 Except as otherwise expressly and specifically provided in this Agreement, no Investor shall have any authority to act for, or assume any obligations or responsibility on behalf of, any other Investor or the Investment. Nothing herein shall be construed to create a general partnership between the parties or to authorize either party to act as general agent for the other party, or to permit either party to bid for or to undertake any other contract for the other party. [** This assumes that the investors will each report one-half of the income from the Property on their respective tax forms, Form 1040, Schedule E. This will save the expense of partnership tax filings. It may be advisable for the investors to specifically elect not to be taxed as partners. This election requires the filing of a Form 1065, Partnership Income Tax Return, with a statement electing not to be taxed as a partnership in conformity with the IRS requirements.].

Section 1.6 The principal place of business of the Investment shall be at c/o *ADDRESS. Copies of any mail or notices received at such address shall be forwarded to *OWNER2 [Name the second investor] at the address provided for herein.

Article II - Management

Section 2.1 The overall management and control of the business and affairs of the Investment shall be vested in the Investors collectively. [** In many cases, investors with certain skills wish to be given authority to make final decisions in their area of expertise.]. Except where expressly provided to the contrary, all decisions with respect to the management and control of the Investment must be approved by both of the Investors and shall be binding on the Investment and on both of the Investors. Upon agreement of the Investors, a manager may be hired and authorized to carry out the ordinary and usual day-to-day business and affairs of the Investment. [** Caution, if a manager is hired, the tax results could be affected unless the Investors remain obligated to perform certain functions such as approving rent terms and tenants, etc. Taxpayers with modified adjusted gross incomes of under $150,000 may be entitled to deduct up to $25,000 of tax losses on a rental property in which they actively participate. See language in Section 2.2.].

Section 2.2 Both Investors agree that they shall actively conduct, or cause to be conducted by others under their supervision, the ordinary and usual business and affairs of the Business in accordance with, and limited by, the terms of this Agreement, including the following:

(1) In a manner which protects and preserves the titles and interests of the Investors with respect to assets owned;

(2) They shall keep, or cause another to keep under their supervision, all books of account and other records required by the Investment in accordance with good accounting principles and procedures (which can include the tax basis method of accounting) applied in a consistent manner, keep statements, receipted bills and invoices, and all other records covering all collections, disbursements, and other data in connection with the Investment, the Business, and the Property. Either Investor, or any person designated in writing by either Investor, may at any reasonable time during regular business hours, and upon reasonable advance notice, review or audit such books, records, and accounts;

(3) To deliver to each Investor a balance sheet and a profit and loss (income) and cash flow statement together with information necessary for preparation of tax returns (state, federal, and local) as soon as reasonably practicable after the close of each calendar year, but in no event later than the date required by the Investment's lenders or Ninety (90) days after the end of the calendar year, whichever is the earlier;

(4) To retain or employ and coordinate the services of all independent contractors, accountants, attorneys, and other persons necessary or appropriate to carry out the Business. [** If any of these persons is related to or affiliated with either Investor, it is best to insert a requirement of arms-length dealings and preferably specifics of what services can be provided for by which related parties and how compensation shall be determined.].

(5) To the extent that funds of the Investment are available, pay all insurance premiums, debts, and other obligations;

(6) Maintain all funds of the Business in a bank account or accounts and, subject to the terms hereof, have the power to deposit and withdraw funds. However, no funds of the Business may be commingled with funds or accounts of any Investor [Some clients may prefer that checks must be signed by both investors. If this is done, provision should be made so either investor can make payments in certain emergency situations.];

(7) When permitted or required by this Agreement, make distributions periodically to the Investors in accordance with the provisions of this Agreement;

(8) Subject to the provisions of this Agreement, operate, maintain, repair, and otherwise manage the Property; and

(9) Generally maintain, manage, and operate Business and the Property in a reasonable manner.

Section 2.3 Books of account shall be kept and maintained by a certified public accountant designated by the unanimous consent of the Investors. These records shall be open for inspection to the Investors at all times during regular business hours, upon reasonable advance notice. A periodic compilation of all relative books of account may be made by the accountant.

Section 2.4 If the Investors determine that the Business requires additional capital for reasonable repairs or operating expenses, both Investors shall make equal contributions to the Business. If either Investor is unwilling or unable to loan the required amount and the other Investor loans the Business the additional amount, interest shall be paid on this additional amount at the rate of the federal mid-term rate as determined pursuant to Internal Revenue Code Section 1274(d) and the regulations there under, plus Two percent (2%). [** The interest rate set by the tax code is a current rate which is more precisely defined as "prime." Some banks no longer quote a prime rate and others have more than a single so-called prime. Also see below where it provides that if this loan isn't repaid in 12 months, there is a right to buy out the noncontributing party.].

Section 2.5 In the event the Investors both consent to execute or enter into or to be bound by any lease, contract, or other agreement with any entity related to or affiliated with either Investor, the Investor and such other contracting party shall be deemed to be sole and independent unrelated entities for the purpose of any such lease, contract, or agreement and as to the performance, implementation, and enforcement of any such lease, contract, or agreement.

Section 2.6 The revenue of the Business shall be deposited into the bank account of the Venture.

Section 2.7 The expenses of the Business shall include only those expenses that are direct costs for the operation, sale, or refinancing of the property and any incremental expenses that are incurred as a result of the operation, sale, or refinancing of the property. All expenses, direct or incremental, shall be mutually agreed to by both parties. [** Consider setting forth specific expenses which can or cannot be included.] Notwithstanding anything herein to the contrary, either Investor may make reasonable repairs, or take reasonable protective measures, of an emergency nature, without the consent of the other Investor, up to Two Thousand Five Hundred Dollars ($2,500) in amount.

Article III - Accounting, Contributions,

Advances, Distributions, and Allocations

Section 3.1 Interests of Investors: The Investors agree that they each have one-half [** or whatever the appropriate ration is] of an undivided interest in the Business and the Property and shall share equally in the profits or losses of the Business and in all distributions of assets of the Business, whether distributions of cash flow (as hereinafter defined) or capital or otherwise. However, should one Investor be required to make a loan pursuant to Section 2.4, such loan shall be repaid before any distributions are made to the Investors.

Section 3.2 Share of Income and Expenses, Assets, and Liabilities: The interests of the Investors in the operation of the Property and any other property and equipment acquired by the Business, and all monies which may be derived from the Business and the obligations and liabilities of each of the parties as between themselves in connection with these operations and with respect to liabilities and losses in connection with it, shall be equal.

Section 3.3 Auditing: Either Investor shall have the right once in every Two (2) year period to appoint, at the expense of the Business, an independent certified public accountant for the purpose of auditing on behalf of the Business the financial results. This accountant shall be provided with access to all financial reports, receipts, canceled checks, accounting summaries, bank reports, and other documents relating to the Business and necessary to the preparation of reports of the Business.

Section 3.4 Income Tax Reporting: For accounting and federal, state, and local income tax purposes, all income, deductions, credits, gains, and losses of the Business shall be allocated equally [** or whatever the other ratio is] between the Investors. Each Investor shall report his respective share of any items of income, expense, gain, or loss on his own tax return. The Investors intend not to be taxed as a partnership and shall therefore cause the accountant for the Business to take any steps necessary to accomplish such result.

Section 3.5 The Business shall distribute its available cash flow as and when the Investors shall mutually agree, subject to the requirements of Section 3.1.

Section 3.6 Credit of Either Party: Neither party shall have the right to borrow money on behalf of the other party or to use the credit of the other party for any purpose, except as specifically agreed to in a writing executed by both the Investors.

Section 3.7 Bank Accounts: All drafts or checks issued in connection with the Business shall be signed by *OWNER1 and *OWNER2. [** The partners must determine whether they want to provide that both of them must sign each check, or that either can sign.]

Article IV - Term, Termination, Sale

Section 4.1 The Business commenced on the date set forth in Section 1.1 and shall continue until the Property is sold, or upon the Default of one of the Investors as provided in Section 4.2, or in no event later than *TERMINATION-DATE. [** Set an outside date for the termination of the investment.] Should one of the Investors die, there shall be no requirement that his estate, beneficiaries, successors or assigns, sell his interest to the remaining Investor. The remaining Investor shall thereupon assume all responsibility for managing the Business and Property but shall not receive any compensation for such services.

Section 4.2 Default occurs when an Investor is unable to pay its share of the costs of the Business and the other Investor is required to advance funds, as set forth in Section 2.4, for a period of more than Twelve (12) months. The Non-defaulting Investor shall have the option to acquire all of the Defaulting Investor's interests in the Business and Property for an amount equal to the Appraised Value of Defaulting Investor's interests, less the amount of principal advanced and interest due pursuant to Section 2.4.

Section 4.3 Should either Investor wish to sell his interest in the Business and Property, he shall sell to the other Investor at the Appraised value of such interest. Payment terms shall be Ten Percent (10%) of the Appraised Value payable on closing of such sale, with One Third (1/3) of the remaining principal balance on each of the next three anniversary dates of such closing. Interest shall be payable annually on such date, at the rate of Ten Percent (10%).

Section 4.4 The Appraised Value of an Investor's interest shall be determined by the Investor wishing to sell, or required to sell pursuant to Section 4.2, (the "Selling Investor") selecting an independent appraiser at his sole expense to value the Property. If the other Investor (the "Purchasing Investor") does not accept such appraised value, it shall select an independent appraiser at its sole expense, to value the Property. If the two appraisers cannot agree on a value for the Building, they shall select a third independent appraiser, at the expense of the Business, and the appraisal of such appraiser shall control. The accountant for the Business shall determine the adjustments to make to such valuation to reflect other assets and liabilities of the Business and any amounts due to or from the Defaulting Investor (the "Appraised Value"). [** Other approaches to valuation and buyout should be reviewed with the client. For example, a set buyout amount could be agreed to by both Investors at the beginning of each quarter or year. Whoever buys in or buys out prior to the next valuation, does so at the agreed price.]

Section 4.5 No Investor, without the prior written consent of the other Investor, shall mortgage, pledge, sell, assign, hypothecate, or otherwise encumber, transfer, or permit to be transferred in any manner or by any means whatever, whether voluntarily or by operation of law, all or any part of its interest in the Property, except to the other Investor as provided in this Agreement. [** Often an exception is carved out permitting a transfer to a trust for the benefit of an Investor's family.]

Article V - Miscellaneous

Section 5.1 All notices, demands, or requests provided for or permitted to be given pursuant to this Agreement must be in writing, by depositing the same in the United States mail, addressed to the party, postpaid and registered or certified or via personal delivery or Express Mail, at the address set forth for each in the Preamble. Any party can change its address for purposes of notification by written notice to all interested parties ("Notice").

Section 5.2 This Agreement contains the entire agreement between the parties hereto relative to the formation, ownership, and operation of the Business and Property and any actions there under. No variations, modifications, or changes herein or hereof shall be binding upon any party hereto unless set forth in a document duly executed by or on behalf of such party.

Section 5.3 Subject to the restrictions on transfers and encumbrances set forth herein, this Agreement shall issue to the benefit of and be binding upon the undersigned Investors and their respective heirs, executors, legal representatives, successors, and assigns. However, notwithstanding anything herein to the contrary, either Investor may transfer or assign its interests to a family member, or a trust for the benefit of a family member.

Section 5.4 Arbitration: Any and all disputes between the Investors arising from, or out of, the terms and conditions of this Agreement, or the execution, breach, or enforcement thereof, shall be resolved by arbitration in the City of *CITY-NAME in accordance with the Rules and Regulations of the American Arbitration Association. Any award of Arbitrators shall be final and binding and may be entered as a judgment in any court of competent jurisdiction, whether state or federal.

IN WITNESS WHEREOF, this Agreement is executed effective as of the date first set forth above.