John M. Lee: The Ins and Outs of TICs

With single-family home and condo prices so high, first time home buyers in San Francisco are increasingly turning to Tenancy in Common (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, with each owning a percentage of the building and having the right to occupy certain spaces in the building. TICs are different from condominium ownership because the owners own the airspace inside their units and own 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 property, so if one party defaults on the mortgage, the other parties have to make the payments on the loan or the lender could foreclose on the whole property. This can be remedied somewhat by having a default reserve fund set aside to handle this type of emergency.

It is important to have a set of rules and guidelines set up beforehand to deal with these and other types of situations, so a TIC agreement, or contract, is necessary. This is equivalent to a set of covenants, conditions and restrictions (CC&R) and by-laws for a condominium association. It will address 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 and how common area expenses, taxes, insurance and maintenance bills are to be paid. Other items include the consequences for default of the mortgage and breaking the rules, how to handle a sale of a TIC interest, first right of refusal to buy out TIC interests and dispute resolution procedures.

A TIC owner has all the tax benefits of homeownership. They also all share in the appreciation of the property. Usually, buyers look at the value of the building and determine if the value is greater sold in parts rather than as a whole because, in the future, it will be sold as either a TIC interest or a condo.

Condo 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 city's lottery. With two- to six-unit buildings, there are occupancy requirements and tenant-intent-to-purchase requirements that makes it more complicated. The City does not allow any conversion on buildings with more than six units.

Another important and complex issue arises upon sale of a TIC unit. Because there is only one loan on the building, if a new loan is required, 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 stake, 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, sellers are looking to trade up to a condo or a single-family home, and would not want to carry a second loan because they need the funds for the property.

Another scenario would be for the group to get a new loan. However, if that were the case and the buyer coming in has a lower equity position and takes over a larger portion of the loan, it hinders the next person selling as there is less loan value available for the future buyer. Agreement on the loans and percentages need to be carefully thought out and agreed upon prior to finalization of a TIC agreement. These problems will manifest themselves more for larger TICs.

I believe that TICs are here to stay and they provide a good entry into home ownership. I remember 15 to 20 years ago, buyers were afraid of condominiums and afraid of joint ownership because of doubts about their appreciation rates. Now, they are well accepted within San Francisco and TICs are the next wave of entry into this expensive real estate market. But if you are thinking about TICs, I would highly suggest you explore the possibilities and evaluate the risks with your real estate agent and an experienced TIC attorney.

John M. Lee is a broker at Pacific Union. For questions about real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.