Buying overview -> Tenants in Common or TIC

Tenants in Common or TIC

Complicated ownership and financing issues make a residential TIC
less expensive than an equivalent condominium.

Understanding the implications of buying an interest in a residential TIC rather than a condominium is important. Speak with both a real estate agent and a lender who have extensive TIC experience. For more detailed online information, I strongly recommend the website of Andy Sirkin, an attorney in San Francisco who specializes in tenants-in-common, fractional ownership, and equity sharing.

The most important differences between a residential TIC and a condominium are the ownership structure and financing.

The acronym ‘TIC’ comes from tenants-in-common, a way of holding title to real estate. ‘TIC’ is also commonly used to refer to an individual apartment in a building in which title is held by two or more individuals as tenants-in-common. In a TIC, two or more people share ownership of one piece of real estate, each owning a specified percentage interest in that property. In a residential TIC, each owner owns a specified percentage of an entire building, not a particular unit in the building. A TIC agreement assigns each owner of the building the right to occupy one specific unit in that building. In a condominium building each condo in that building is an individually owned separate piece of property.

Residential TICs are becoming more common, especially in cities like San Francisco that restrict the conversion of apartments into condominiums. A residential TIC essentially lets people join together to buy one building with two or more apartments with assigned occupancy rights so that each owner of the building has a right to live in one of the apartments. The share of each owner-occupant’s property taxes is tax deductible, as it would be for a condo or a single family house. Mortgage interest paid by a residential TIC owner-occupant is also tax deductible.

There are two types of financing for residential TICs, group loans and fractional loans. When people join together to buy an apartment building, two units and up, they can get a group loan. A group loan is one loan on the entire building for which all of the owners are responsible. For group loans on buildings of two to four units, there are numerous lenders and loan products available; over four units, only multifamily loans are available, and the group loan choices become more expensive and complicated. The other lending option for a TIC is fractional financing. Each owner of a unit gets a loan secured by that owner’s fractional share of the building. There are few lenders, and few loan options, in fractional financing. Both group and fractional loan options are discussed in more detail in TIC financing.

One of the most compelling reasons to purchase a TIC is the lower price compared with a similar condo. The price discount to a TIC buyer reflects the higher costs of financing a TIC, as well as the less desirable ownership structure – a share of a building with an agreement to occupy rather than a deeded condominium property. Because a TIC is discounted compared to a similar condo, it may have the possibility of substantial capital appreciation if the property can be converted to a condominium in the future.

Before you purchase, balance the risks in TIC ownership against the lower price relative to a condo. For example, there are only two banks currently making fractional TIC loans; in an adverse market environment, if those banks stopped making fractional TIC loans it could become difficult to sell an individual TIC unit.

Also, many TIC buyers assume that they will be able to convert their unit into a condominium in the future. Converting a TIC into a condominium, a ‘condo conversion’, depends on the acquiescence of the municipal authorities. In San Francisco, legislation hammered out by the Board of Supervisors in June 2013 will affect all future condo conversions. Because of that new legislation the number of units in a building, the date the TIC agreement was put into place, and whether there are protected tenants currently in the building may determine if and when the building can convert to condos. This could have a profound impact on future values.