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 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 two types of loans available for the purchase of a building owned as a tenancy in common: group loans and fractional 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.

What's the minimum down payment required for a group TIC loan?

If the loan amount your group needs falls within the Fannie Mae/Freddie Mac conforming loan limits for 2-4 unit buildings, a 20% down payment is required.  If the loan amount your group needs is above the conforming limits, but within the agency jumbo limits, a 25% down payment is required.  Shown below are the current conforming and agency jumbo loan limits for 2-4 unit properties: 

If the loan your group needs is above these limits it will be considered a jumbo loan and fall within jumbo loan guidelines.  Generally speaking, a 25%-35% down payment will be required depending on the loan amount.

TIC group financing example(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.

Please note, a partial transfer transaction necessitates that one owner remove his name from title to the property, a buyer add his name to title, and the remaining co-owners stay on title throughout the transaction.  This falls outside of conforming loan guidelines.  For this reason, a conforming loan is not available for group loan refinances done in connection with the sale of a unit.  Only jumbo loans from certain lenders can accommodate such a transaction. 

Because jumbo loan rates and terms may be less favorable than for a conforming loan, the selling owner may find it difficult to convince his co-owners to participate in a partial transfer refinance.  Even if the co-owners do agree, the building may still not be able to refinance because it doesn't have enough equity.  Jumbo loans used for partial transfers generally require more equity -- 35-40% in many cases.

Sales of TIC units within existing TIC's where a group loan is in place are often very complicated.  If you're in need of such financing, please contact me for guidance about your situation.

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.

Fractional TIC Loans

Althoug rates for group loans are generally much better, 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. Fractional TIC loans solve this problem.

How do fractional 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 fractional 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.

What down payment is required for a fractional loan?

Currently, 20% is the minimum required down payment.  If you can put down 25% or 30% you'll get a slightly better rate.

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

Currently, fractional TIC loans carry interest rates above group loans, come with a 1% origination fee (one point or 1% of the loan amount), and are harder to qualify for than group loans. Many borrowers are unable to qualify at the higher rate of interest and more restrictive guidelines. 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.

Fractional financing example (three unit building):

Second Loans for TICs

Except in situations where a group is making a large down payment, second loans are generally not available for 2-4 unit properties.  The mortgage crisis left us with few second loan options and almost none for 2-4 unit buildings.  The loans which are available provide for maximum financing to only 60-70% of a building's value.  This means the group must make a 30%-40% down payment before any second loan options are available.  Usually, first loans provide for 60-70% financing so there's no need for a second.

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? 

The few loans available 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.

Can I offer buyers a second loan when I sell my unit?

You may have to.  Lending guidelines are tighter now than when many TIC's were purchased.  The group loan your TIC group can secure in today's market may be at a lower loan-to-value percentage. For example, you may have purchased your TIC with 80% or even 90% financing but currently only 65% is available.  This means very little of the new group loan will be available for your buyer.  Your co-owners need it to refinance the outstanding balances they have on their portions of the current group loan.  To make up the difference you can provide a private second loan.  This will allow for a reasonable down payment and make your unit more attractive to potential buyers.
 
If you have a fractional TIC loan you are allowed to provide second loan financing for an additional 10%.  Fractional TIC lenders allow an 80% first loan and an additional 10% second loan.  As mentioned above, there are no institutional sources for a second loan behind fractional TIC first loans.  This leaves you as the only source.  By offering a private second loan you can make your unit more attractive to potential buyers because only a 10% down payment is required.

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.