Creative Real Estate: Tenancy in Common (TIC) Agreements

In many parts of the US and the world, real estate and zoning restrictions force people to devise creative ways of owning and transferring real estate titles. One such market work-around I’ve encountered lately is the tenancy in common, or TIC. TICs are common in San Francisco, and to a lesser degree in New York City, where co-ops proliferate. If you’re house-hunting in San Francisco, you’re going to encounter at least one TIC. They are seductively priced and appear to be a great deal…but there’s a lot more to the story. (Note: I’m going to focus this article on TICs in San Francisco; in the future, I’ll talk more about NYC co-ops, which have similar dynamics to a TIC from a buyer standpoint.)

By way of introduction to the concept, I have a special treat to share. I toured a TIC last weekend and shot a video to give you a feel for the appeal of TICs. This unit is in a very popular neighborhood in San Francisco. It has 2 bdrms/1.25 baths, was recently renovated, and is on the 2nd floor of a 3-story, 5-unit building. The price was just reduced to $499,000, which to the uninitiated would seem like an unbelievable deal given the central, hip location.  [View on Redfin]

Here’s the video tour:

Looks nice, right?

Here’s the thing. When you buy a TIC, you don’t really “own” your unit, per se. That’s because a TIC is a form of fractional ownership. In essence, TICs enable a group of people buy a building together, with each person getting the legal right to occupy one portion of that building.

If this sounds a little hippy-skippy to you, you’re starting to understand TICs. Here’s an article about a group that formed a TIC in Brooklyn, New York. The article tells about a couple who wanted to buy a home for their expanding family, but were discouraged by the places that were within their budget. So they recruited a friend of theirs, and the three bought a 3-unit brownstone in Brooklyn. The couple lives in the bottom unit, their friend in the top unit, and they rent out the middle unit. The brownstone has a garden, all parties have a nice home without breaking the bank, and everyone’s happy.

Let’s dig a little deeper. In this commune-reminiscent arrangement, you may be wondering who pays what, and who’s in charge in case someone doesn’t pay their share? Most TICs form an HOA (home owners association) to govern the TIC, collect monthly dues, and manage maintenance and repairs.

When it comes to financing a TIC, there are two options:

• Everyone in the TIC shares a loan (traditional financing)
• Each party in the TIC gets their own loan (fractional financing)

With traditional financing, there is a single loan secured by a single deed. Up until a few years ago, this was the only financing option. A group of people would band together to get a single loan, and each person would be responsible for paying their share. People I know who are in TICs with traditional financing say they have total trust in TIC co-owners; everyone knows each other’s income, credit score, and the details of their financial lives. This is important because everyone is in the same boat, and you want to ensure each person is doing their share of the rowing.

Here's another TIC, boasting 3 bdrms/2 baths for $649K. A good price, until you dig into the messy world of TICs.

More recently, fractional financing has become available, so each person can now get their own loan–each person has their own boat and their own oar. But the boats aren’t very strong. That’s because with fractional financing, there are multiple loans but only one deed, which everyone sort of shares. This means banks do not like making fractional loans, because if you default, they cannot repossess your deed through foreclosure. Only a few banks will even consider making a fractional loan, and when they do, you’ll have to put at least 20% down, pay a higher interest rate, and your loan will likely only be for 3-8 years (after which you’ll have to hope you can get another loan).

This financing issue is why TICs are typically priced lower than condos, and also why they are very difficult to sell.

But there is a possible upside to TICs, aside from their lower cost. (Click through to find my tidy summary of the pros and cons.)The city of San Francisco has a lottery, where each year 200 lucky TICs are allowed to convert to condos. If you buy a TIC, being able to transform it into a condo raises your property value hugely. Condos don’t have all the restrictions and financing limitations, so they’re much easier to buy and sell. But of course TICs must meet a litany of requirements and pay various fees in order to enter the lottery. The good news is they can enter multiple years, and each year they enter they get more “tickets.” In 2008, over 2,000 TICs entered the lottery.

The legal questions and restrictions behind TICs and condo conversion–especially if renters were evicted at any point–is immensely complex. If you are considering buying a TIC, you absolutely positively must consult an experienced lawyer.

To summarize, here are the benefits of a TIC:

• Lower price than comparable condos
• Good for people who have lots of cash or who don’t need financing
• Potential huge upside if TIC is able to condo convert

But let’s not forget the drawbacks:

• Large down payment, high interest rate, and only short-term financing usually available
• HOA restrictions often limit the ability to rent or sublease
• Lots of regulations and restrictions around tenants rights (if the home was ever renter-occupied) and condo conversion guidelines
• Very difficult to sell

The most comprehensive resource for understanding TICs is the site for lawfirm Sirkin & Asssociates. Everything you ever wanted to know, and lots more, can be found on that site. SocketSite has information about condo conversion statistics and guidelines.

That’s it for my crash course on TICs. Next time, we’ll take a look at the New York co-op. I can’t wait to dig into the world of Upper East Side co-op review boards, which are known for being totally merciless about who they let into their co-ops.

Do any of you have experience with TICs, or other “creative” real estate arrangements? Does this sound totally off the wall to you, or like something you’d consider?