In 1999 I bought a tenancy in common unit in the three-unit building pictured to the left. My co-owners and I converted the building to three condominiums in 2005, and then I sold mine and purchased a single-family home. My positive experience with TIC ownership led me to make TIC financing a focus of my business. The information I have to share is drawn from my experience as a TIC owner as well as the work I've done on behalf of many clients who have purchased TICs.

Buying a TIC

What is a TIC?

Holding title to property as tenants in common is a popular form of ownership in San Francisco--especially for first-time homebuyers. Two or more buyers can purchase a duplex or multiunit property and reside in separate units. Each buyer will own an undivided percentage interest in the building along with the exclusive right to occupy one of the units. Strictly speaking, the term "tenancy in common" refers to a legal form of co-ownership (but in San Francisco it is often used to refer to the actual building or unit as well).

Why would I want to buy a TIC?

One reason you might want to buy a tenancy in common unit is that the price is often below what you would pay for a condominium. However, the financing for your purchase will be different. Group TIC loans are secured by multiunit buildings and are usually much larger than loans used for the purchase of a condominium. For these reasons, lenders consider them to be riskier. To compensate for the additional risk, lenders often require a larger down payment, charge a higher rate of interest, and impose stricter underwriting guidelines on borrowers. This can make it harder for you and your partners to qualify for a TIC loan. Separate or "fractional" TIC loans are also available and are explained below.

What type of financing is available for a TIC?

In general, there are three types of loans available for the purchase of a building owned as a tenancy in common: group loans, partially assumable group loans, and separate TIC loans.

Group TIC Loans

With group financing, the purchase of a building is financed with one loan taken out by the buyers as a group (or two loans if a second mortgage is used). It's not possible for you, the buyer, to take out a separate loan for your unit because the lender views the building as a single property which can have only one first lien secured against it.

How do I qualify for a group TIC loan?

Before granting or denying a TIC loan, lenders will examine the credit rating of each partner of the group separately--but will then aggregate the income and assets of the group. This means that if you have a large income but little saved money for a down payment, you can benefit by joining up with others who are in the opposite situation. However, if one of your partners has problems with credit, it may affect everyone. Lenders base their approval on the lowest credit score within the group. One partner's low credit score could make it harder for the group to qualify, or may lead to a higher interest rate for everyone.

Here's an example of a group TIC loan for the purchase of a three unit building:

What are my financial responsibilities as a TIC unit owner?

Once your TIC group buys a building, each of you is responsible "jointly and severally" for the repayment of the mortgage. If one of you is unable to pay the debt, the other co-owners remain obligated to the lender. TIC partners generally have a written agreement governing what happens in such situations. The agreement calls for the establishment of a reserve fund to cover at least one month's mortgage and expenses. If the situation cannot be resolved quickly, the nonpaying co-owner may be forced to sell his or her unit in accordance with the provisions set forth in the agreement.

There are several law firms in San Francisco that specialize in the creation of TIC agreements, which are similar to condominium CC&R's (covenants, conditions and restrictions). CC&R's detail the rules that must be upheld within a condominium project's homeowner's association. The principal difference is that TIC agreements also specify what percentage of the building each co-owner holds, and address what happens when someone within the ownership group has problems repaying the mortgage.

What happens when I need to sell my TIC unit?

The sale of your TIC unit is referred to as a "partial transfer" because you are transferring your percentage interest in the building to a new buyer. In reality, everyone knows that you are selling your TIC unit, but legally speaking, what you are actually selling is your ownership percentage in the entire building as well as the exclusive right to occupy the unit you are vacating. When your sale is closed, a portion of the building's ownership will be transferred to your buyer.

How will my sale affect the remaining co-owners?

Owners of condominiums and houses are free to sell whenever, and to whomever, they like. With TIC units, however, it's a little more complicated. Your selling your unit may have an effect upon your remaining co-owners' financing. Until recently, the sale of a unit within a TIC group always meant that the remaining co-owners had to refinance the existing loan to admit a new owner. If interest rates were higher than what was in place for the initial group loan, the remaining co-owners would likely object to the refinance because it would increase their mortgage payments.

A standard clause in TIC agreements usually stipulates that if an owner sells one of the units, the sale cannot increase the remaining co-owners' mortgage payments. If rates happen to be low when you sell your unit, great! Everyone wins because your remaining co-owners are able to refinance to lock in a lower payment--and your buyer can join them on the new loan. If rates are higher, you'll be responsible for keeping the remaining co-owners' payments the same after the refinance. To do this you might have to pay "points" to buy down the interest rate on the new loan or issue a cash credit to the remaining co-owners to offset the increase in their mortgage payments. Depending upon where rates are at the time, this could be a significant expense.

Assumable Group Loans

One way to avoid such a situation is to make sure that your group loan is "assumable." With an assumable loan your lender will allow your buyer to take over your portion of the existing group loan. In this situation, financing for the remaining co-owners would not change and their payments would remain the same.

At first glance, assumable loans appear to solve the problems involved with selling a TIC interest. Unfortunately, they rarely do. Most assumable loans cannot be assumed until the adjustable period is in effect. For example, if your group loan is a 5-year adjustable rate mortgage, your rate will be fixed for the first five years and then become adjustable. Most lenders only allow a loan to be assumed after the interest rate begins adjusting. When you think about it, this really doesn't count for much. The reason for assuming a loan is to benefit from the favorable interest rate already in place. If the loan's rate has adjusted to the prevailing market rate, why not just get a new loan? If it did, the group could "start the clock" again, locking in a rate for several more years. With the existing loan the rate will continue to move up and down.

Because of the inflexibility inherent in group TIC loans, I strongly recommend considering a partially assumable group loan or, better yet, a fractional TIC loan for your TIC purchase.

Partially Assumable Group Loans

The primary advantage of a partially assumable loan is that your buyer can assume your portion of the group loan at any time during the loan's term, and without the need for your remaining co-owners to re-qualify. This means that your buyer can take over your loan and benefit from the interest rate that you have locked in. It also means that only minimal effort from your co-owners will be required for your sale--a better scenario for you, since "time is money" when you are a seller!

How does a partially assumable group TIC loan work?

When you buy your TIC you won't necessarily notice the difference between your partially assumable group loan and a standard group loan. The difference will become apparent when you sell. If your loan has an interest rate which is fixed below current market rates, you will be able to offer your buyer the opportunity to assume the loan, making your property more attractive with a below-market rate and ensuring that your co-owners won't have to refinance.

In order for your buyer to assume your portion of the group loan, he would need to submit an application to the lender. The lender would qualify him separately without asking to see new income and credit documentation from the remaining co-owners. This means that the remaining co-owners do not need to re-qualify for the loan--nor will they hold up your sale because they aren't providing the required paperwork quickly enough.

More importantly, if one of your co-owners has had a change in employment, it won't affect your buyer's ability to assume your loan. For example, if someone recently became self-employed, most lenders won't allow that person's income to be used because he doesn't have a two year history of self-employment. Another example is a TIC partner on maternity leave or taking time off after having a child. With a partial assumption these situations wouldn't be a problem because the lender is not asking to see the other co-owners' paperwork again. (Of course, your buyer will still need to be comfortable with your co-owners' ability to support their portions of the mortgage payment.)

Please note: while partially assumable group loans are still available from some lenders, rates for these loans are not currently better than rates for fractional TIC loans. For this reason, it may make sense to consider a fractional TIC loan instead.

Here's an example of a partially assumable group loan:

Separate TIC Loans

Although partially assumable loans are an improvement over traditional group loans, they still don't address the basic risk associated with TICs: if one of your co-owners is unable to pay the mortgage, you and the other co-owners are still responsible for making the payment. Separate TIC loans (sometimes called fractional loans) solve this problem.

How do separate TIC loans work?

With fractional loans each person in your group can take out a separate mortgage for his or her purchase. If one owner defaults, the lender can foreclose upon his unit without affecting you and your co-owners. The group will still own the building together and will be jointly responsible for paying the taxes and insurance. The difference is that your largest bill, the mortgage payment, will be your responsibility alone.

Why were separate TIC loans created?

Lenders have traditionally viewed multiunit buildings as one of two types of occupancy: owner occupied or non-owner occupied (investment). To qualify as owner occupied, only one owner needs to live in the building. In both cases the lender's loan is secured by a deed of trust recorded against the entire property. Since lenders consider owner-occupied properties less risky, they generally offer a lower rate and better terms for them. Having all owners occupy separate units in the same building is something that happens in only a few real estate markets in the country. For this reason, there wasn't much need for a mechanism that allows a loan to be secured against a fractional interest in a building.

In San Francisco, TIC purchases have grown significantly over the last several years--and lenders have reacted to the demand by introducing separate TIC loans. The TIC agreement in place on a property is what makes separate TIC loans possible. All TIC agreements have language specifying which unit each owner occupies and what percentage of the building he or she owns. This language has allowed TIC lenders to specify which part of the building secures their loan.

How do I qualify for a separate TIC loan?

When you and your TIC partners purchase a building with fractional loans, the lender will qualify each borrower separately. Unlike single shared loans, separate loans do not allow one borrower's strength to compensate for another's weakness. In this case, each buyer must present his or her individual income, assets, and credit history--and this is the information that the bank uses to approve or deny the loan. The upside is that each owner is free to choose what type of TIC loan he or she wants. For example, if you prefer to have the rate fixed for five years but your partner only needs it to be fixed for three years, one of you can get an 5-year adjustable-rate mortgage (ARM) and the other a 3-year ARM.

Are there any reasons why I wouldn't choose a separate TIC loan?

Currently, separate TIC loans carry interest rates above group loans and require larger down payments (between 20% and 30%).   Many borrowers are either unable to make the required down payment or unable to qualify at the higher rate of interest. Even if they can qualify for the loan, many are still unwilling to accept a higher mortgage payment. For this reason, many TIC buyers opt for group loans in spite of the fact that separate loans are less risky and make it easier to sell.

Here's an example of separate TIC financing:

Second Loans for TICs

Lenders for group TIC loans generally limit their loan amount to 80% of a building's value and, because the loans tend to be larger, sometimes as low as 65%. If your TIC group can't make at least a 20% or larger down payment you'll need a second loan to make up the difference between your down payment and your first loan.

If you and your co-owners have fractional TIC loans, the only source for second loan financing is from the seller. Currently, there are no conventional lenders offering second loans behind fractional TIC loans. Seller provided financing is discussed below.

What types of second loans are available for a TIC purchase?

Generally speaking, second loans come in two varieties: fixed second loans and lines of credit. (Click here for a detailed explanation of second loans.) Second loans used in conjunction with group TIC loans are the same as those used for the purchase of a condominium or single-family home.

How does my TIC group qualify for a second loan?

As with group TIC first loans, lenders will examine the credit rating of each partner in the group separately--but will then aggregate the income and assets of the group. If one of your partners has problems with credit, it may affect everyone's ability to qualify. With separate TIC loans you'll qualify for your second loan on your own.

What happens to the second loan when I sell my TIC unit?

Chances are your building (and, consequently, your unit) will have appreciated since your purchase. If so, great! You'll be making a profit on your sale. However, if you have group financing this means your portion of the group loan (which your buyer can assume) will probably be less than 80% of the sale price of your unit. Unless he is able to make a down payment large enough to bridge the gap, your buyer will need additional financing from a second loan.

Unfortunately, conventional second loans are not assumable. This means that the group will need to refinance its existing second loan into a new, larger, loan to provide additional financing for your buyer. When I discussed non-assumable group loans above I pointed out the risks involved with having to ask your co-owners to refinance in order to complete your sale. Those risks apply to the refinance of a group second loan as well. However, they are mitigated by some important differences between first and second loans:

• Second loans are usually much smaller than first loans. If your group purchased your building with a 10% down payment, your second loan will probably be for no more than 10% of your building's original purchase price. Any increase to the interest rate on this loan will have a much smaller impact on your remaining co-owners' monthly payments.
• Even if you need to pay "points" to buy down the interest rate on the new second loan--or even issue a cash credit to your remaining co-owners--it will probably be a much less expensive proposition than with a larger first loan.

If you and your co-owners cannot arrive at an equitable agreement, you may want to provide the additional financing yourself. When an owner provides financing to a buyer it is referred to as "seller financing" and the owner is said to be "carrying back" the loan on behalf of his buyer. If you provide the additional financing, your loan would be in third lien position behind the existing first and second loans on the building. (Read on for or an explanation of what that means.)

What are the benefits of providing seller financing?

If you offer to carry back financing it will give prospective buyers the ability to make a smaller down payment. This will make your unit attractive to more buyers and may help you sell more quickly. Another benefit is that you can charge a fair market rate of interest on your loan. This means that you can earn money on the proceeds from your sale by lending it to your buyer.

Do I have to offer financing to my buyer?

Sometimes offering to carry back a second loan is a necessity, especially if your remaining co-owners do not agree to refinance their existing second loan to accommodate your buyer. Since many buyers cannot make a large down payment, you may have to offer seller financing in order to attract buyers with smaller down payments.

How can I make sure the loan I provide to my buyer is secured?

Title companies can prepare and record all the necessary paperwork. Because your loan would be in third position behind the second and first loans on the property the first two lenders would be paid before you in the event of a default. However, you could request that the TIC agreement be amended to specifically address what happens if your buyer can not make payments on your loan. As with the first and second loans, there could be a provision that states that a one-month reserve account will be established and that the unit will be sold if payments to you cannot be made.