Here’s an explainer video we’ve made…
We See, You Want to Buy a TIC...
A uniquely San Francisco Way to Buy a Property that Otherwise Looks Like and Feels Like a Condo — Except It's Not a Condo.... Huh?
The differences between a house, 2 condos or 2 TIC units and an income property can make all the difference in San Francisco real estate prices, potential tenant issues, financing and the potential a property has. So knowing the differences between all of those is something many turn to Kevin Ho and Jonathan McNarry to understand as they guide their clients to real estate success in San Francisco.
How Does It Work?
San Francisco's Quirkiness has Lead to Some Contorted Legal Fictions
TIC, 123, ABC...
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. Think of this all as “owners in common.”
- 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) which will greatly impact market value.
- Various factors determine if a TIC building can go condo and not many are in your control such as if someone evicted a tenant in the past (like before you even moved to San Francisco, or were born, etc).
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.
What Does the Data Say?
TIC Values vs Condo Values in San Francisco
So, Why Would I Buy A TIC?
There are pros and there are cons
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.
- 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.
- 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. Why is it more affordable? Because there are fewer lenders who lend on TICs the buyer pool is smaller with less competition
- 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. Because it’s tough to demolish and rebuild historic buildings creative designers and developers have turned old-facade buildings into fully modern homes on the inside that most often can only be TIC units lest units get removed from rental inventory
- For TICs that can convert, a TIC is really a pre-condo with loads of value just waiting to be unlocked. (Note: the Rent Ordinance applies to original subdividers so you can effect any backdoor evictions
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.
So, What Am I Missing Here?
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
Just A Few Lenders Will Lend on a TIC Purchase or Just Use 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. 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.
But Wait, There's More...
Click Below to Learn About Condo Conversion in San Francisco
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 with whom 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
Mortgage Loan Officer
Redwood Credit Union
San Francisco, CA
Office: (415) 355-9055
Mobile: (925) 577-0578
Investment Property Capital (Mortgage Broker, access to National Coop Bank TIC loans)
BRE #01126077 | NMLS #348746