What is a TIC and is Owning One Risky?

San Francisco skyline
TICs remain a popular form of housing in San Francisco.

Tenancies-in-common, also called tenants-in-common or TICs, remain a popular housing option in San Francisco – but they can prove befuddling to the uninitiated.

“TICs are typically bought for partners or for individuals who might not otherwise be able to enter the market,” said Patrick Barber, president of Pacific Union International’s San Francisco region. “The entry price is lower than with a condominium.”

In simplest terms, it’s a group of people pooling their resources to buy a multiple-unit building.

Like condominiums, TICs rely on detailed agreements dictating rules for the building and outlining what owners can and cannot do. But TICs differ significantly from condos in that a group rather than individuals owns the entire property, with each partner having a percentage share.

A written agreement — rather than a deed recorded in county records — describes who gets access to which units, as well as storage and parking spaces and other amenities.

Factors that have contributed to the rising popularity of TICs in San Francisco include the high price of real estate, the city’s rent-control ordinance, and strict rules governing condominium conversion, said Rosemarie MacGuinness, an attorney specializing in TICs at San Francisco-based Sirkin & Associates.

San Francisco restricts condo conversions to buildings with fewer than seven residential units and allows just 200 units to convert each year.

“The city of San Francisco is interested in keeping a balance between units that can be sold and keeping units for rentals,” MacGuinness said. “They want to maintain a stock of rental apartments. For that reason, they put a cap on the number of units that can be converted to a condo every year.”

TIC owners generally buy with the hope of converting their unit to a condominium, thus lowering the financial risk and boosting their home’s value.

“Most real estate professionals agree that conversion generally increases a property’s value,” the law firm Goldstein, Gellman, Melbostad, Harris & McSparran LLP said in a report. “Conversion allows co-owners of multi-unit buildings to eliminate many of the risks of co-ownership, and to facilitate sale of individual units, by replacing shared financing with individual mortgages.”

However, the process can be slow and cumbersome for buildings with more than two units.

Three years after buying a building, most TIC owners can submit their names to San Francisco’s annual condo lottery. The city designed the lottery system so that the odds go up each year, but with an increasing number of entrants, some say wait times are on the rise.

In 2012 all units that had been waiting eight years won conversion rights, but next year there will be too many entrants in that category to guarantee a win for each unit, the Goldstein and Gellman report said.

“It’s been a crazy process,” TIC owner Karen Solomon told the San Francisco Chronicle. “When we first bought, everyone said we’d convert within five years. Then they said seven. Now it’s, ‘You’ll get it when you get it.’”

The process is much simpler for two-unit buildings, which in many cases can bypass the lottery.

In the past, some prospective buyers eschewed TICs because of the necessity of securing a group loan, in many cases with strangers. However, once “fractional” loans – individual mortgages for each owner – became available for TICs, many buyers considered the risks much lower.

“Most TICs of three or four units are now (financed) with fractional loans,” MacGuinness said. “That means that if one owner decides not to pay … the lender can only foreclose on that owner’s share.”

While several lenders once offered fractional loans to TIC owners, just two remain today: Sterling Bank & Trust and NCB, said Gordon Friedman, a mortgage broker who specializes in TICs.

Interest rates for fractional TIC loans are slightly higher than those of condos and single-family homes, and buyers generally must provide a down payment of 20 to 25 percent of the sale price, Friedman said. Also, 30-year fixed rates aren’t available for fractional TIC loans.

Because the loans aren’t conforming and lenders “can’t sell them to somebody else to get them off their books,” terms are limited to three, five, or seven years, he said.

Aside from foreclosure and credit risks associated with group loans, problems can also arise when a single TIC owner falls on tough economic times and is unable to qualify for refinancing in the case of a sale or condo conversion. However, many TIC agreements provide for those potential problems by specifying that an owner who no longer qualifies for refinancing must sell, MacGuinness said.

And while a good TIC agreement will cover most potential problems, conflicts among owners sometimes do arise and make their way to court, said Jeff Woo, a San Francisco property attorney and president of the San Francisco Association of Realtors.

Woo said he recently represented a client in a case in which owners of a TIC building couldn’t agree where to put the garbage cans, resulting in a five-day arbitration and at least $100,000 in attorneys’ fees. Of course, such disputes are relatively rare and can occur in a range of group living situations, he noted.

“There’s a lot of emotion that’s involved when people are arguing about these little petty things that are involved in their lifestyle,” Woo said. “The lesson is: One, read the agreement well. Two, if there are any holes in the agreement or questions about it, whatever answers you get from the co-owners, get them in writing.”

(Photo of San Francisco by Trey Ratcliff, via Flickr.)














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