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Jason Chapin's Blog

By Jason Chapin | Agent in San Francisco, CA

What is a TIC and why should I care?

With so many questions being asked about TIC’s I felt it might be helpful to establish a post specifically about this topic...

 

What is a TIC?

We use the term TIC to refer to property, but Tenancy In Common (TIC) actually describes a form of shared ownership, not a type of property.  Tenancy In Common (as a form of ownership) is really an estate planning tool.  It is how two or more people hold title to a parcel when they want to specify or account for fractional interests.  You can imagine that investors would prefer this type of ownership.

 

We use the term TIC to refer to a unit within a building where owners take title as Tenants In Common.  In San Francisco there are strict limits on the conversion of multi unit buildings to individual condos.  So, for example, when there are three parties interested in buying separate units within a three-unit building, they can take title as Tenants In Common and behave as though the each own their own unit.  We would describe each unit as a TIC, but really we’re talking about the form of ownership.

 

How is a TIC different from a condo?

A condominium is a legally subdivided parcel. When you buy a condo you take title to that whole parcel separate from other condo owners.  You can encumber your interest with a loan as you see fit.  A TIC isn’t a separate parcel from the whole building and though your ownership interest is a specified fraction of the whole, you share title with other Tenants In Common.  To secure a residential loan, all ‘tenants’ would have to work together.

 

To subdivide a condominium, developers must create and register Home Owners Associations with the Secretary of State.  HOA’s govern the common interests within the development.  TIC members may develop similar guidelines or they might not.  Generally, TIC members develop legal agreements up front regarding fractionalizing interests among the owners, defining exclusive use areas for each unit and budgetary and operating guidelines.

 

What are the risks associated with buying a TIC?

Buying a TIC in this or any market bares additional risk - which is why they're more affordable.  You can finance a condo, single family home, or multi-unit building (up to four units) with a residential loan. Strictly speaking, you cannot finance a separate TIC unit with a residential loan.  To secure a residential loan all ‘tenants’ would have to work together.  They would have to be underwritten as a group.  The downside to this is that all four owners are equally liable to the loan. If one party fails to pay their portion, the whole loan risks default.  In essence, group loans impose shared liability.

There are local lenders who have evolved fractional financing for TIC ownership.  These lenders will write different loans for each TIC unit, making each owner liable solely to their own loan. This eliminates the risk associated with a group loan.

 

On the other hand, there is no secondary market for a fractional TIC loan.  They are not considered residential so they cannot be sold to Fannie Mae and they’re not as marketable to Wall Street. The lenders who write them tend to use them as revenue generating vehicles.  Their relative interest rates are higher than residential loans and the lenders don’t currently write fixed-rate terms. I don't fully understand why, but they just aren't available.

 

Fractional TIC loans eliminate the risk associated with a group loan, but they introduce a different kind of risk.  First, you must deal with higher rates and the risk associated with an adjustable interest rate. You also take on the risk associated with have a relatively new and exotic style of loan that is not guaranteed to exist for future buyers. 

What are the benefits of buying a TIC?

There are two primary benefits.  First, their respective prices are lower.  Generally, TIC prices are lower than condo prices by 20% - 35%.  This benefit is somewhat undermined by higher interest rates for fractional loans, however.  In certain circumstances, you may be able to bypass the condo conversion lottery system for fast track conversion.  This not only improves marketability and value, but creates individual and whole ownership.  In these cases, TIC’s can represent interesting investment opportunities.

 

The second benefit is that in certain neighborhoods – the older neighborhoods where new development is few and far between – TIC’s represent an increased pool of inventory.  It’s true, too, that most TIC’s are in San Francisco’s older Victorian-style buildings and many buyers are attracted to that style.

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