In 1999 I was a first-time buyer looking for a home in San Francisco. The market was very competitive, so a friend and I decided we'd have a better chance of finding what we wanted if we purchased a two-unit tenancy in common, or TIC, together.
After an extensive search, we made an offer on the three-unit building pictured to the left. Since we only needed two units, our agent helped us find a third TIC partner. Fortunately, our bid was successful and we all became homeowners for the first time. I moved into the top unit, my friend took the middle, and our new TIC partner had the ground-level unit.
The three of us lived there for three years, at which point we were allowed to enter the San Francisco condominium conversion lottery. Amazingly, we won the lottery on our first try and then converted the building to condominiums. We completed the conversion in 2005, and I sold my unit and upgraded to a single-family home.
That experience led me to make TIC financing a focus of my business. I am your expert source for the best rates and terms available for TIC loans, as well as the most up-to-date information about TIC ownership. I also have an established network of attorneys, title companies, accountants, and other service providers I can refer you to for specialized help with your TIC. Please read on for detailed information about TICs and their financing.
What is a TIC?
A TIC is a unit within a multi-unit building that is owned separately but doesn't appear as a separate property on county records. Sound confusing? Essentially, it's one way a group of people can pool their resources to buy a property they couldn't afford on their own.
The term "tenancy in common" refers to a legal form of co-ownership that has long been available for all types of residential and commercial properties. San Franciscans, however, use the phrase "TIC" more loosely, referring to both the legal form of ownership and the property itself. In addition, the term also can denote a multi-unit building owned as tenants in common, or an individual unit within such a property.
In 1979 San Francisco decided to impose rent control on apartments, so those who worked in the city could afford to live there. Since then, the city has further strengthened its rent-control ordinance, as well as its efforts to preserve rental housing. Because converting apartment buildings to condominiums eliminates rental units, the city instituted an annual lottery to limit the total number of conversions to no more than 200 apartments per year.
To enter the lottery buildings needed to satisfy minimum owner occupancy requirements: Buildings without owners living in them, or without enough owner-occupants, couldn't participate. And only properties with three to six units qualified. Buildings with more than six units were not eligible. (Two-unit buildings were exempt from the lottery.)
Since hundreds of buildings with thousands of total units applied each year, the odds of winning were slim. This allowed the lottery to achieve its goal of significantly limiting the formation of new condominiums and preserving rental stock.
Because the lottery limited the supply, it had the secondary result of pushing condo prices higher. TICs emerged as a less expensive alternative to condominiums. In fact, the city puts no limits on the number of TICs that can form or sell in any given year.
The End of the Lottery and Expedited Conversion
In 2013 new legislation suspended the condominium conversion lottery for at least a decade. During the ten-year moratorium, the backlog of buildings that lost in the past will convert to condos on an expedited basis, so long as they meet specific requirements and the owners pay a special fee to the city.
During the moratorium the city won't allow any new applications for conversion during that timeframe. This applies to all new TICs formed and sold going forward, as well as any existing TICs that didn't meet the law's requirements.
In the near-term, the supply of condominiums will increase as newly converted units sell. However, once all expedited conversions go through, only two-unit TICs will be able to convert until the lottery returns. This will likely keep the supply of condominiums low and prices for them high.
Thus, demand for TICs should remain strong as they continue to offer an affordable alternative to condos.
Buying a TIC
The use of TICs as an alternative form of ownership in San Francisco started more than 15 years ago. Since then, TICs have grown in number and gained acceptance as a legitimate form of ownership in San Francisco, especially for first-time homebuyers. While there is no official TIC count, thousands of these properties exist in San Francisco with several hundred sold each year.
Why Buy a TIC Instead of a Condominium?
Simply put, TICs are less expensive than condominiums even though they're often of the same quality. Given the choice, many buyers opt for a TIC to get the same amount of space and location as a condominium, but at a lower price. TICs offer buyers the opportunity to live in San Francisco's best neighborhoods, in the Victorian buildings the city is known for, at a price they can afford.
If condominiums were the only option, many buyers would be priced out of the city's most desirable areas, or even the city itself.
Over the last decade, developers have constructed hundreds of new condominiums in San Francisco. However, most development has taken place in the city's South of Market neighborhood. Building new condominiums in more established neighborhoods remains challenging thanks to scarce land and strict rules limiting development. This, in conjunction with the caps placed on condominium conversions, has limited the supply of new condos available in the city's best neighborhoods and has kept the demand for TICs high.
What Are the Differences Between a TIC and a Condominium?
I work with many buyers who begin their search for a home by looking at condominiums but quickly turn to TICs instead. That's because TICs are less expensive and provide the space and location they want. If you've found yourself in this situation, it's important to understand how TICs differ from condominiums.
The city maps condominiums separately, meaning they're on record as individual parcels of property for tax purposes. In contrast, San Francisco recognizes only the building the TIC units are in and not the separate units inside.
For example, a four-unit building with each home owned by a separate owner as a TIC will appear on city records as a four-unit property. All the owners will be listed, but there won't be any information concerning who owns what unit within the building. Only the ownership percentages for each titleholder in the TIC will appear.
If you buy a condominium and use a loan for your purchase, the lender records a lien against your property by associating it with the corresponding parcel in city records. This lets the lender know exactly what property provides the collateral for its lien, thus making it easy to secure a loan against a condominium.
As a result, condominium loans are widely available at competitive rates and terms. And because condominiums are acceptable collateral for loans guaranteed by Freddie Mac and Fannie Mae, conforming loans at competitive rates are available to finance them.
TICs, however, differ significantly from condominiums and do not qualify for conforming financing. Because TIC units aren't mapped separately, lenders can't place a lien against them in the same way they would against a condominium. To finance a TIC, a special type of loan called a fractional TIC loan is required. Just a few lenders offer fractional TIC loans -- and only within the city of San Francisco. Because the demand for these loans is small, the rates and terms are not as favorable as those for conforming condominium financing. (More on fractional TIC loans below.)
The fact that TIC units don't appear separately in city records also impacts how their owners handle property taxes. Officials issue tax bills for the TIC building rather than the separately owned units within the property.
Therefore, TIC owners must divvy up the bill and pay the city all at once. If one owner doesn't pay his or her portion, all of the other owners are still liable. In contrast, condominium owners who fail to pay their taxes only impact themselves and not other units in the complex.
Differences between condominiums and TICs
Conforming and jumbo loans are widely available at competitive rates and terms.
The city issues separate tax bills, which are the sole responsibility of the condominium owner.
Only a few lenders offer fractional TIC loans. Rates and terms are less competitive than those available for condominium loans.
The city issues tax bills only for the multi-unit property, not for individual TIC units. All owners within a TIC building are jointly and severally liable for the tax bill – if one owner doesn't pay, all other owners are still responsible.
Generally speaking, 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. So far, I've mentioned only individual fractional loans. That's because they're by far the best way to finance a TIC unit.
However, the other option available is to secure one loan to purchase a multi-unit property and share the financing among co-owners. I refer to this as group financing.
Group TIC Loans
Before fractional TIC loans became available, the only way to finance the purchase of a TIC was to share a loan with your co-owners. In fact, many older TICs in San Francisco still have group loans place. However, sharing financing is fraught with problems and, with the exception of two-unit TICs, I do not recommend using group financing.
While fractional TIC loans are a specialized type of loan that only a few lenders offer, group TIC loans are not. Lenders view loans secured by San Francisco-style TIC buildings in the same way they see loans for other multi-unit properties. They are not aware of, and are not concerned with, who owns and occupies which unit within the building. Similarly, they do not require or review TIC agreements. (For condominiums, lenders often want to review the CC&Rs before lending.)
With group financing, a TIC group purchases a building by taking out one loan together. It's impossible for any of the owners to also take out a separate loan for their TIC unit within the building. The lender views the building as a single property, which can have only one first lien secured against it. The lien is placed on the building and each owner in the building is "jointly and severally" liable for its repayment. This means if one co-owner can't pay his or her mortgage, the others are still responsible.
Group TIC loans usually come with higher rates and more restrictive terms than loans for condominiums or single-family homes. They're usually much larger than loans used for the purchase of a condominium or single-family home because multi-unit properties tend to be more expensive. Also, group TIC loans are secured by buildings with several units, some of which may be rented.
For these reasons, lenders consider loans for multi-unit properties to be riskier. To compensate for the additional risk, they require a larger down payment, a higher interest rate, and stricter underwriting guidelines.
Group TIC Loan Risks
As mentioned above, group TIC financing is often problematic and should be avoided whenever possible. The most obvious risk is that because you and your co-owners share responsibility for the same loan. If one or more of the owners can't pay the mortgage, the other co-owners are on the hook. And, if the mortgage payments arrive late, everyone's credit suffers.
While most prospective TIC buyers focus on these issues, I believe the biggest challenge with group TIC financing is how difficult it makes it to resell units.
A TIC unit sale is called a "partial transfer" because the owner is handing over his or her percentage interest in the building to a new buyer. In reality, everyone knows a TIC unit is being sold but, legally speaking, what's actually happening is that a percentage ownership in the entire building is changing hands. When the sale closes, a portion of the building's ownership will transfer to the new owner.
A partial transfer transaction necessitates that one owner remove his name from the property's title, a buyer then add his or her name, and the remaining co-owners stay on title throughout the transaction. To accommodate a partial transfer, the existing mortgage must undergo refinancing.
Such a transaction falls outside of what's allowed by almost all lenders, and the few lenders who offer it charge higher rates and require more restrictive terms. Because so few financing options are available, a selling co-owner may find it difficult to convince his or her co-owners to go along with refinancing the group loan to accommodate a sale. And even if the co-owners cooperate, other challenges remain.
Sales of units within existing TICs with a group loan can prove difficult to close because it's hard to get a high enough appraised value. Since most TIC buildings now use fractional loans and individual units close separately, appraisers often can't find recent sales of multi-unit properties to compare with group-TIC-financed buildings. So appraised values end up coming in far below the total of what the units might sell for individually.
Of course, if the appraised value comes in too low, the group won't be able to refinance and the would-be sale can't move forward.
That's in part why very few TICs sell with group financing anymore. Instead, fractional loans are used to allow separate, non-simultaneous closings for each unit in the building.
In addition to issues with appraised values, today's more restrictive lending guidelines make it difficult to refinance a group TIC loan. The maximum loan-to-value percentage for multi-unit loans has decreased from a few years ago.
In the past many TIC groups used shared financing to purchase their buildings when lending guidelines were less restrictive. Today's lending rules require larger down payments to buy multi-unit buildings and more equity to refinance. A group may have purchased a building with 20 percent down but to refinance, 30 percent to 40 percent equity may be needed.
It's a double whammy - appraised values are low and lending guidelines are more restrictive. Both lead to diminished options for people selling units in TICs with group financing.
Fractional TIC Loans
Fractional TIC loans are the best way to finance the purchase of a TIC unit for several reasons:
- Fractional loans let each owner within a TIC building have his or her own loan with no responsibility for the mortgages of the other co-owners.
- Each co-owner may choose to have a different type of fractional loan or even different lenders. For example, one owner can have a five-year adjustable-rate mortgage, or ARM, and another a seven-year ARM.
- If buyers want to pay cash for a unit in the building, they can feel comfortable doing so even if the other owners take out loans on their units. Each owner is responsible for his or her own financing, and owners without loans have no responsibility for other loans in the building.
- With fractional financing, when a unit sells in a TIC, the remaining co-owners aren't impacted and can keep their fractional loans.
- Appraisals for TIC units are performed on the unit themselves, not the building. Unlike values for buildings sold as TICs, values for individual TIC units are supported in the market.
- If an owner in a TIC defaults on his or her loan, the lender will foreclose on that unit without impacting the other co-owners.
Why Were Fractional TIC Loans Created?
Having multiple owners occupy separate units in the same building is something that happens in only a few real estate markets in the country. Until San Francisco-style TICs became popular, there wasn't much need for a mechanism allowing a loan to be secured against a fractional interest in a building.
Initially, group loans financed all TICs. But over time TIC groups began to wrestle with the problems inherent in sharing financing with their co-owners. Buyers demanded a better way to finance TICs, and lenders responded with fractional TIC loans.
How Do I Qualify for a Fractional 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, individual financing does 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 the bank uses this information to approve or deny the loan.
Fractional TIC Loans and TIC Agreements
TIC agreements make fractional loans possible. A TIC agreement is similar to a condominium covenants, conditions and restrictions, or CC&R, which details the rules within a condominium complex's homeowner's association and outlines how disputes are settled. CC&Rs also include building diagrams showing "exclusive-use areas," such as which parking spaces are assigned to which owners.
TIC agreements address the same issues but also specify what percentage of the building each co-owner owns and which unit each co-owner has the right to occupy.
Because public records only reflect the percentage interest each co-owner has in the multi-unit property, there's no municipal record that can verify who lives in what unit. In fact, TIC co-owners typically own an interest in all of the building's units. Their ownership interest is "undivided," meaning each owner has an equal right to use the entire property.
The TIC agreement serves the crucial purpose of identifying which unit each owner lives in and then granting each owner an "exclusive right to occupy" that unit specifically. This is what makes fractional TIC financing possible and lets lenders know which unit secures their lien.
In addition to occupancy rights, TIC agreements also address how co-owners divide property taxes. The agreement may include provisions for setting up a reserve account with funds available to pay taxes twice a year.
Several attorneys and law firms in San Francisco handle the creation of TIC agreements. Please see the resource list below.
Fractional TIC Loan Rates
Shown below are current rates for fractional TIC loans. All TIC loans have a 30-year term, but the longest fixed period available is seven years.
3 year arm
5 year arm
7 year arm
Fractional TIC loans do not have a prepayment penalty and are assumable by subsequent buyers after the loan's initial fixed period. In addition, all TIC loans come with an upfront 1 percent origination fee (1 percent of the loan amount borrowed) in addition to standard closing costs. For example, the upfront fee for a $300,000 loan would be $3,000 to $3,750.
Underwriting guidelines for TIC loans are somewhat stricter than for conventional condominium or single-family home financing. I can help you determine if you qualify for a fractional loan.
In San Francisco two-unit TICs differ from larger TICs because of how easily they can be converted to condominiums. When the condominium lottery was still in effect, two-unit TICs were exempt and could begin the conversion process after one year of owner occupancy without having to enter the lottery.
To gain an owner-occupied designation, both units had to be occupied by separate owners for one year. Despite the lottery's suspension, two-unit TICs may still convert under the same rules.
This critical difference means group financing may be an appropriate choice for buyers of two-unit TICs. The risks associated with group financing still exist, but the amount of time the loan is shared is limited.
After the first year of owner occupancy, most two-unit TICs can then complete their conversions within six to 12 months. This means the total time they share financing is two years or less. The likelihood that one of the owners will want to sell a unit or will run into financial problems during that time period is low.
Why would buyers prefer a group loan? Interest rates and costs generally run much lower for group loans than for fractional loans.
Nonetheless, there are still many valid reasons for using fractional financing to purchase a home in a two-unit TIC. For example, if one unit sells before conversion, the other co-owner doesn't need to refinance to accommodate the sale. Also, if a buyer for one of the units pays cash and the other co-owner needs financing, a fractional loan will leave the all-cash unit unencumbered.
Finally, conversion isn't an option for a two-unit TIC that's not 100 percent owner-occupied, so co-owners on a group loan would share financing indefinitely. Fractional financing is the best choice in this situation.
I can help you determine whether group or fractional financing makes the most sense for your two-unit TIC.
Refinancing Post Condo Conversion
Many TIC groups in San Francisco are currently in the process of converting their units to condominiums. That's because they've either won the condominium lottery or have been lucky enough to qualify for expedited conversion under the new legislation approved in 2013.
If your TIC is in the process of converting, congratulations! You're on your way to gaining financial independence from your TIC co-owners. In addition, you'll likely see your unit's value jump immediately after the conversion. By some estimates, your unit will be worth 10 percent to 15 percent more as a condo than as a TIC.
Completing the condominium conversion process will keep you busy for several months. However, it's important to begin planning your post-conversion strategy now. Will you sell your unit? Will you refinance to a condo loan? What are your co-owners planning to do?
It's important to realize that refinancing to condominium loans post-conversion is an all-or-nothing proposition: Unless everyone in your TIC group is able to do it, no one can. This applies to TIC groups with shared financing, as well as groups that have fractional loans on each unit.
If you plan to refinance, I can help you and your co-owners determine if each unit has enough equity to do so. I can also pre-approve each co-owner in your group for a condominium loan to make sure everyone qualifies.
By starting this process early, I can help you find solutions to any challenges we come across concerning ability to qualify or sufficient equity to refinance.
If your plan is to sell your unit, it's especially important to figure out if your co-owners can refinance to ensure your sale will move forward.
Your co-owners will need to refinance to condominium loans at the same time your buyer secures financing for the purchase, all loans must close concurrently, and your co-owners' refinancing will dictate the timing for your sale.
I can help ensure that whatever plans you and your TIC group have post-conversion go smoothly.
Below is a list of service providers I've worked with directly and can recommend:
Rosemarie MacGuinness, Attorney
Sirkin & Associates
388 Market Street, Suite 1300
San Francisco, CA 94111
Lyssa Kaye Paul, Attorney
Paul Law Group
505 Montgomery St., 10th floor
San Francisco, CA 94111
TIC Accounting Services
San Francisco TIC Financial Services
Ted Dubasik, CPA