Real Estate Column: TICs: Balancing Risk and Cost

Over the last 10 years, TICs have gained a reputation in San Francisco as a more affordable alternative to condominiums. Short for “tenants-in-common,” the term refers to a co-ownership agreement for a multi-unit property, usually 2 to 6 units.

In the rest of the country, people who own homes as tenants-in-common are often related or married. In San Francisco, a three-unit Victorian, for example, is often purchased by three entirely unrelated persons or families, who then sign a contract that describes how they will manage the property and procedures in case of default, death or sale.

Vilified by tenants rights groups because the properties that become TICs were usually part of the rental pool, TICs nonetheless have provided homeownership opportunities for many people who might not otherwise be able to afford to own in San Francisco at all.

However, those opportunities come with an increased risk. Owners of TICs do not have the same level of protection as condo owners, and usually share a single loan. This means that if one owner defaults, the other owners must make up the shortfall or risk foreclosure.

The shared loan also creates additional complications when an owner decides to sell a few years after the initial loan. Either the entire TIC group has to re-finance (possibly at a higher interest rate, especially in today’s market), or, if the incoming purchaser is able to assume the previous owner’s portion of the loan, a separate payment must be made to compensate the seller for the appreciation on their portion of the property, which can be significant.

Unlike a condominium, in which each owner holds title to his or her unit in addition to a percentage of the common areas, there is only one title to a building owned as a TIC. In the eyes of the state, a condominium building is a collection of properties, while a TIC remains a single property, no matter how many units or owners it has.

A TIC partner owns a percentage of the entire building, and has a signed agreement with the other owners that grant him or her exclusive use of a particular unit. Because this arrangement is contractual and not encoded in state law, it is subject to local law, and the SF Board of Supervisors has made several attempts to limit the attractiveness of TICs in order to protect the rental stock.

Due in large part to the expert efforts of TIC contract lawyer Andy Sirkin, TIC agreements have evolved to create greater levels of protection for TIC partners than were previously available.
At the same time, some lenders have created a new form of financing that allows for individual loans, despite the co-owners sharing a single title to the property. Known as fractional financing, these loans are usually charged a premium – up to one percent – throughout the life of the loan.

That may not sound like much, but on a $750,000 TIC unit with 20 percent down, it can make a big difference. Yet it has proven to be an attractive option for many buyers because it mitigates the financing risk explained earlier.

A few years ago, TICs were discounted up to 20 percent relative to the price of a similar condo. Nowadays, it is often 10 percent or less – and that margin can disappear in a bidding war. Coupled with the financing premium on a fractional loan, a TIC today can cost the same as a condo – and then there are the costs and headaches of condo conversion, if you manage to qualify (which is another matter unto itself). And despite the advances in TIC agreements and funding, the legal protections afforded to owners of TICs still lag.

Duboce Triangle resident and TIC owner Jim Rudoff is a Realtor with McGuire Real Estate and publishes a complimentary monthly newsletter with articles like this one. He can be reached at
296-2102 or jim@jimrudoff.com. Visit jimrudoff.com for info.

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