John M. Lee: The Evolution of TICs

With single family home and condo prices so high, first time home buyers in San Francisco are increasingly turning to Tenancy in Commons (TIC) as their entry point into home ownership.

The term "Tenancy in Common" refers to a way of holding title to real property. In a TIC purchase, a group of buyers take title as tenants in common, owning a percentage of the building, while having the right to occupy certain spaces in the building. This is different to condominium ownership, where the owners, instead of shares, own the airspace inside their units, and own the common areas jointly.

In a condo, the owner can point to a unit and know that he or she owns that unit. In a TIC, the owners jointly own a percentage of every part of the property.

Because it is a joint ownership situation, buyers need to be aware of some of the risks involved and assess that risk prior to buying a TIC. One of the most important is financial risk. There is only one loan on the building, so if one party defaults on the mortgage, either the other parties have to make the payment on the loan or the lender may foreclose on the whole property. This can be remedied somewhat by having a default reserve fund set aside to handle this type of emergency.

In the last couple of years, several lenders have started to offer fractionalized interest loans where each individual is responsible for his or her portion of the loan. And upon sale, the lender has the ability to adjust the amount of the loan up or down. Thus, with this loan product, TIC's are looking more like condos.

Because of this, the popularity and sales of TIC's have increased quite a bit the last few years. TIC agreements also have evolved. This is equivalent to a set of covenants, conditions, and restrictions (CC&R) and by-Laws for a condo association. It addresses issues such as who has use of what part of the property, including storage and parking; how common areas are to be shared and used; how the common area's expenses, taxes, insurance and maintenance are to be allocated among the owners; consequences for default of mortgage and breaking the rules; how to handle a sale of TIC interests; first right of refusal to buy out TIC interests; and dispute resolutions.

Some people purchase TICs with the hope of converting them to condos. The conversion rules are complex. The easiest ones are for a two-unit building with both units owner occupied. After one year of continuous occupancy, the building can be converted into condos without going through the lottery.

With two- to six-unit buildings, there are occupancy requirements and tenant intent to purchase requirements that makes it more complicated. The City is not allowing any conversion on buildings with more than six units.

Another important and complex issue arises upon sale of a TIC unit. If there is only one loan on the building, everyone in the group has to submit paperwork to apply for the new loan. If the existing loan is partially assumable, the new buyer can apply to take over that loan.

However, if the property has appreciated, or if the seller has substantial equity in portion of the TIC, the buyer will have to buy with a large down payment; otherwise, the seller of that interest might have to carry back the balance in the form of a private loan. Usually, that seller is looking at trading up to a condo or a single-family home, and would not want to carry a loan because they need the funds to move up. That would present the ideal time to refinance into a fractionalized loan to take care of this problem now and in the future.

I believe that TICs are here to stay and it provides a good entry form of home ownership. I remember 20 years ago, buyers were afraid of condominiums and were afraid of joint ownership deals because they didn't know if the property would appreciate in value.

Today, they are well accepted within San Francisco and TICs are gaining popularity as an entry into this expensive real estate market. But if you are thinking about TICs, I would highly suggest you explore the possibility and evaluate the risks with a good Realtor and an experienced TIC attorney.

John M. Lee has recently been elected to be the CFO at the San Francisco Association of Realtors. If you have any questions, call him at (415) 447-6231 or e-mail to johnlee@isellsf.com.