On Condos, the Lottery and Tenants In Common: The TIC System as We Know It… or, Knew It

SUPERVISORS TO DEBATE PROPOSED CHANGES THAT COULD FREEZE LOTTERY FOR 10 YEARS, GRANT LIFE-TIME LEASES AND ALLOW OTHERS TO CONVERT ON SET SCHEDULE

“Conditions subject to change” is almost a throw-away, boilerplate phrase you’re likely to see almost everywhere these days thanks to those pesky lawyers (sorry!). From airplane tickets to online shopping, you may suddenly find the ground beneath you changed in a blink of an eye. For those owning certain tenants-in-common home in San Francisco this may be the case come May 7, 2013. That’s when the Board of Supervisors for San Francisco is to vote on proposed changes to the City’s confounding TIC/Condo legislation. The current system is predicated upon the fact that condominium units are mostly exempt from stringent rent control laws while TIC units are not.

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TIC 101: The ABCs of Rent Control and Why Condos are Valued More

Recall each and every condo unit will have its own legal title that is universally recognized by buyers and lenders alike; one unit = one title, multiple titles per building. Owners of a TIC unit however are buying a percentage of the entire building with a governing contract agreement defining which owner gets which space; one building = one title, no matter how many units. This applies to the more than 85% of residential buildings in the City originally occupied before 1979.

 

How It Works Practically

Let me discuss how it works. When you buy a TIC there’s only one legal title for the entire building. This is unlike a single-family home or condo where each unit has its own title. Instead, the reason why you live in Unit 1,2 or 3 is because of a contract agreement you buy when you purchase. You are purchasing a percentage of that single title. In SF people want to convert for two main reasons: (A) it brings the unit out of the rent controlled pool, and, (B) each unit would therefore gain its own individual title. Once that’s achieved, any bank will lend on it, the owner can do anything he or she wants like take an equity line of credit out, or will it to someone — whatever their heart’s desire. The important thing is that your potential buyer pool has now expanded. After all, only 2 banks currently lend on TIC purchases (Sterling and NCB) and their rates are higher (.075 – 1 percent) and down payments are higher (20% minimum, sometimes more), and financing is never fixed beyond 7 years. Because of the City’s pro-tenant bent and the desire to keep housing affordable, the city greatly restricts the numbers of buildings that can convert to 200 buildings a year. Currently, only 2-unit buildings that are occupied by different owners are allowed to skip over the condo lottery. Otherwise it’s the condo lottery. (Think you can skip over it just because you have 2 units but rent one out? Nope, even if you were a 2-unit building and rented out one unit, you’d still have to enter the lottery). One commentator estimates: if you bought in a 6-unit building that is otherwise condo-conversion eligible, it would be 2030 before you could convert.

To even get into the lottery owners have to meet requirements relating to how long an owner must live at a property before entering (three years) and what ratio there is between owner-occupied units vs. ones tenants rent and disqualifying past building evictions — even ones that may have taken place years ago between completely different people. The lottery takes place in January or February of a given year. Here’s a rough scenario for you:

  • Let’s assume Bob, Mary and John buy in a 3-unit building in 2005, 2010, and 2012 respectively. They all owner-occupy (for 3-units you need just one owner, for 4 it’s 2, for 5 and 6 it’s 3). Here, because Bob first occupied in 2005, the building can enter the lottery in 2008.  They enter the condo lottery and they lose each year — 5 times they lose. But each time they loose, it means that their chances increase the next year because they get more tickets in the lottery and may be elevated into a luckier pool of lottery entrants. BUT, if Bob sells his unit then everyone else left takes a hit downwards in time. Therefore, the number of tickets and 3-year residency requirement is then judged by the next senior owner — Mary. Because Mary only bought in 2010, she hasn’t met the 3-year requirement yet for 2013, but she will in 2014. And when Mary does qualify the number of lottery tickets is reduced/reset back to year 1. Bye-bye special pool and 5 years of dashed hoopes. So instead of getting the number of tickets a 6th year entrant would, the building gets the 1st year allocation. 

Enter Scott’s Idea…

Let’s admit it: that system is complicated and leaves too much to chance, right? Well, to combat this weird-sense with some common sense, in late 2012 Supervisor Scott Wiener originally proposed a resolution that would allow a limited number of TIC owners to pay a fee to bypass the lottery. But this being San Francisco, the original idea has been drastically rewritten. Drastically so. The revised legislation passed the Land Use Committee and will be up for a Supervisor vote on May 7, 2013.

The salient points of what the changes are as of April 28, 2013:

  • 5- and 6-unit buildings will be unable to convert after a 10 year freeze of the condo lottery;
  • certain tenants in TICs may be given a life-time lease (yes, life time – not the channel, but the number of years); and,
  • there will be a conversion schedule for buildings otherwise eligible for conversion as of April 15, 2013.

Whats does this mean? Well if you bought in a 6-unit or 5-unit building that would otherwise be eligible to convert into condos in the first place I’d be peeved. Really peeved. While those who bought in such buildings weren’t about to win soon, they still had the hope they could change one day. (Yes, I’ve heard stories of buildings winning way, way early, but for the most part don’t count on it). For 3- and 4-unit buildings it would be dicier if the legislation passes especially if the building is being occupied by all new owners starting after April 15, 2013. If the legislation passes (which it may well do) this could drastically impact prices downwards for new TICs coming online and for those buildings who did not meet owner-occupancy minimums.  On the other hand, if the building was eligible to convert on April 15, 2013 (certain owner occupancy minimum times and ratios must be met along with a ‘clean’ eviction history) prices could go up because a date certain for conversion could be established.

Learn More from the TIC Guru

There’s lot’s more to process, so read more about it from THE guy who widely started using the TIC legal device 20 years ago Andy Sirkin:

http://www.andysirkin.com/HTMLArticle.cfm?Article=219