A S C L E A R A S M U D
Here’s a simple way to remember that will help you remember the difference between a condominium and a tenancy-in-common unit: if a particular space has its own title deed, it should be a condominium (and also exempt from rent control). Lenders the world over will recognize what a condominium is and be able to loan on it. If there’s only one title for the entire building but multiple units (like an apartment building) that’s either an apartment building or a collection of TIC units (all of which would be subject to rent control and eviction control regulations in San Francisco).
What’s a TIC?
Tenancy In Common Units Are An Affordable Way To Get A Property in the City, But It’s A Little More Complicated Than Going to the Lender and Just Moving Right In
During your property search you may come across a seemingly incredible steal of a deal for a renovated space in an older Victorian and Edwardian shell. You’re excited. You think you’ve found it. How could someone overlook this deal? Did you miss something? Then you look closer again and you’ll see these words: “tenancy in common,” or, “TIC.” What’s that supposed to mean? TICs may look like a condo, feel like a condo and act like a condo but they are legally distinct and this will impact lending, rental rights and other important rights that go beyond this summary.
- Tenancy-In-Common units — TICs for short — are a hybrid between a single-family house and a condominium that are pretty unique to San Francisco. Legally, you’re buying and undivided interest in a property. In reality, a private contract between other owners of a given property will spell out what percentage of the property you’re buying and what comes with that given interest. Selling properties this way was a response to the Rent Ordinance’s stringent tenant protections, a restrictive building environment that is informed by historical protection requirements as well as neighborhood comment on any permit that expands a building’s foot print. Thus, TIC units came into use through the efforts of a clever attorney, smart lender and realtors.
- Some TIC units may become condo, but not all of them can (or will)
What You’re Really Buying — The Sharing Economy
Going into even greater detail: Instead of getting your own title deed like you would with a condo or a house purchase, when you complete a TIC unit purchase you end up with an interest in the parcel’s title deed. What that amount is will be determined by that private contract between other TIC owners commonly referred to as a TIC Agreement. A better way to think about is this: when you buy into a TIC building you’re really becoming an ‘owner in common’ with the other folks who already (or will) own the property with you. It’s more likely than not that your TIC Agreement will have been written by one of 3 firms in the City but each one is different as each building and/or TIC unit will have a different history that will impact owner rights and condominium conversion possibility. TIC units that have the possibility of converting into condo units (technically a subdivision of a parcel) will be worth more and valued more versus ones that cannot.
Be Careful, Everyone Has to Sign that TIC Agreement
Like we said above, a TIC purchase, on its face, is a purchase of an undivided ownership interest in a given piece of real property. TIC agreements not public record but it is important that all owners sign the document and any updates that take place when an owner sells and a new one buys. So, if you’re buying into an established TIC building, if it weren’t for you signing the existing TIC Agreement, you could occupy any part of the property. Conversely, if future buyers in the building don’t sign onto an existing TIC Agreement, they too may have the right to barge into your unit and take over it. The sheriff would be powerless to do anything at first. Therefore, it becomes vital that a comprehensive TIC Agreement will delineate your ownership and occupancy rights over a certain part of the building – “unit 2A,” for example. Unlike the governing documents of a condo building (called the CC&Rs), TIC Agreements are not recorded with the City and do not ‘run with the land,’ as CC&Rs do.
So, Why Buy a TIC? Ownership is Still Ownership
If various criteria are met that involve the building, its rental history, the ratio of owners to renters and number of units are satisfied then there’s a boost in equity and property value when a building ‘goes condo.’ Why? Unlike houses and condos, only two lenders loan on these purchases and those loans are not the conventional ones either. This means you have less willing, able and qualified buyers to compete for the property. Converting into a condominium can raise market values anywhere from 10-20% depending on the circumstances, location and finish level of a property.
- Because there are fewer lenders who lend on TICs the flip side is that they are more affordable than if a unit was legally a condominium.
- Owning beats renting. Remember that TICs will appreciate like other properties too, which means that there’s a fair chance that you should recover what you’ve paid into a property when you sell it down the line.
- There’s still income potential. Unlike most condominiums and single-family houses, the Rent Ordinance will control a TIC’s rental abilities. Apart from any HOA restrictions on renting a unit out, you can still rent a TIC unit out to a tenant. And while rent control and eviction control regulations apply to limit increasing a renter’s rent or limiting the causes by which you can evict a tenant, you can set the initial rent at any amount you want — just be happy with it as you never know how long a given renter will stay. And if that renters leaves you can reset the rent to any amount you want for the next tenant.
Remember this is all general background information and you should ask us or an attorney well-versed with TICs in San Francisco to learn more before proceeding with any purchase.
Compare and Contrast: Median Sale Prices Between Tenancy-in-Common Unit Sale Prices and Condominium Sale Prices
TIC, 123, ABC...
Why Buy A TIC?
An affordable way to enter the real estate market as many TICs are more affordable than their condominium equivalents — this is great for folks who want buy their first home but also know they want to upgrade that home within 5-7 years, which leads us to the following, as owning a TIC may lead to…
A potentially great investment opportunity. Depending on the unit a TIC may be able to convert into a condominium unit that has its own title deed and is exempt from the rent control portions of San Francisco’s Rent Ordinance; and lest we forget, TICs straddle…
The best of both worlds. TICs are located within older buildings in the more popular parts of the City (Noe Valley, Hayes Valley, Pacific Heights, Telegraph Hill, the Mission and so on) but will often contain units that have had the “This Old House,” treatment that combines modern amenity living with buildings with period details and character.
Therefore, a TIC can be, in some cases, a pre-condo with potential value just waiting to be unlocked.
It All Boils Down to Buying a Title Deed
Or Proceed with Caution?
Let’s explain what is TIC is by telling you what you don’t get when you buy a TIC unit. When you buy a house or condo, you’re buying a bundle of ownership rights over a piece of real property that is symbolized and communicated to the world by a title deed. That real property, of course, is derived from the sovereign (aka, the people who had the swords who conquered the land and who brought enough order to give/sell/grant land to folks — you know, to the victor goes the spoils).
Those grants were then divided into various divisions starting with townships, sections, fractional sections, rods, down to the parcel which, in San Francisco, is about 25 ft wide x 100 ft deep. For condominiums, the parcels get smaller and smaller with many fitting into the footprint where one house may be. Each parcel will have their own separate legal descriptions and parcel numbers. Each parcel is individually mapped, numbered and on record with the local county assessor, treasurer or recorder’s office and are a matter of public record. Most important, each of those parcels will have its own separate title deed but are subject to restrictions that run with the land in the form of CC&Rs — conditions, covenants and restrictions. See here for more on what you get when you buy a condominium.
- But for TICs the only document that gives you the right to live in your particular unit is a private contract agreement — the TIC Agreement— that is subject to human fallibility. For example, if one owner doesn’t sign the agreement they, in theory, can live in any part of the building and there’s little anyone can do about it. Really.
- Also, enforcing rental restrictions, keeping books and accounting straight can get very murky very fast.
- Last, there are only very limited financing options available and the units are still subject to Rent and Eviction Control regulations, which can be really contentious if condo conversion is anywhere on the table.
How to Finance A TIC Purchase
Two Lenders or Cash.
Buying or selling a house or a condo boils down to transfer ownership of a property’s title deed from one person to another thanks to the exchange of money. Because most people don’t have piles of cash sitting around a buyer will go to the open market to see what type of mortgage loan they can afford to finance the purchase. And pretty much any lender will know what a house or a condo is as each will have its own respective title deed. Therefore with that common denominator defined, any lender can lend on it, package that loan and sell it as a security on a bond market for example. TICs are unlike single–family home and condo lending where buyers can take advantage of FHA–backed programs and/or draw equity lines of credit in a crowded marketplace. Instead only certain local banks and one national lender will fund a TIC purchase. These lenders will require a larger down payment among other requirements. Loans tend to be adjustable, which can offer lower rates while a building is waiting to undergo the conversion process. Some TIC loans will be held collectively by all of the owners as a group, i.e. group loans. Thus, you might be assuming another person’s previous share of the loan when you purchase a TIC interest.
More recently lenders began to offer individual fractional loans in the late 2000s as a market response to make TIC sales more appealing. Fractionalized loans will act to insulate you from another TIC owner’s potential default or late payment; i.e., your credit score wouldn’t be lowered because your neighbor TIC owner forgot to pay their mortgage bill on time. TIC loans have other requirements about partition sales and post-close reserve amount requirements that your lender or lawyer can explain. Importantly, though, TIC owners can claim the mortgage interest deduction as well in most casesl. And property taxes are also typically deductible.
Only two or three banks will lend on TIC purchases these days and one of them you must access using a mortgage broker (National Coop Bank) and the other is intermittent in its lending (Bank of San Francisco). Sterling Bank is the only local, brick and mortar bank that regularly lends on TIC purchases. Here are the folks to talk to who we’ve worked with before:
Henry T. Jeanes
Mortgage Consultant / TIC Financing Specialist
Sterling Bank & Trust
Noe Valley Residential Lending Office
3800 24th Street
San Francisco, CA 94114
T: 415.970.9889 x12204
F: 248.351.7232 / 415.970.9880
Investment Property Capital (Mortgage Broker, access to National Coop Bank TIC loans)
BRE #01126077 | NMLS #348746