TENANCY IN COMMON (TIC)
*A CONDO ALTERNATIVE
Are you considering purchasing a TIC? You probably want to know…
- What is TIC?
- How is TIC different than a condo?
- Should I buy a TIC unit? Is TIC a safe investment?
- What are the pros and cons of TIC ownership?
Fortunately, we have compiled the answers and research for you!
TENANCY IN COMMON (TIC), FRACTIONAL OWNERSHIP has been around since the 80’s. It’s hugely popular in San Francisco. Because of this, there is a lot of research and data available for your review. One the most comprehensive sources of information is Andy Sirkin’s website, andysirkin.com. Andy is a San Francisco attorney who pioneered TIC Fractional Ownership in the 80’s. He has personally owned multiple TIC units. And he is the most knowledgeable and desired attorney to prepare new TIC Agreements. In this booklet, we have compiled many of his blog posts addressing commonly asked questions, and detailed explanations about TIC.
ABOUT THE RENTAL GIRL:
The Rental Girl (therentalgirl.com) is a full service Real Estate brokerage specializing in residential leasing and sales. We have been serving renters and landlords since 2004. We work with thousands of Los Angeles renters each year, and many of these renters are qualified to buy, but can’t afford or find a home in a neighborhood they want to live. In 2014, a client of ours introduced us to TIC ownership and we saw immediately how many renters and entry level buyers in LA could benefit from a TIC market here. We met with Sterling Bank, who was working actively to pioneer a TIC market in LA, and other San Francisco vendors. And so began our research on TICs. Since then, we have helped bring 16 TIC units to the market, and we have over 50 TIC units coming soon. With every new TIC building that hits the market, more renters, landlords and realtors are discovering TIC sales and the TIC movement is growing rapidly. We love to share our accumulated knowledge, and support our real estate colleagues, landlords and renters and the TIC community.
ABOUT ANDY SIRKIN:
D. Andrew Sirkin is a recognized expert in TIC fractional ownership and other co-ownership. SirkinLaw APC was a pioneer in the area of TENANTS IN COMMON (TIC) arrangements involving occupancy rights
assignments, which are often used as a substitute for subdividing a property when true subdivision is impossible or unduly expensive. In 1985, Andy Sirkin created the legal and transactional structure which has become the industry standard for this type of TIC. Over the succeeding years, Andy’s innovations have included being the first state-approved real estate instructor for occupancy-based TICs, being the first to obtain state approval for a large-building TIC sale, being the first to convince institutional lenders to offer individual TIC financing, and being the first to develop the loan documents and lender underwriting guidelines for fractional TIC financing. In recent years, the type of co-ownership arrangement Andy conceived nearly 25 years ago has grown to comprise approximately 1/3 of all attached-home sales in San Francisco.
SirkinLaw APC has prepared close to 3,000 occupancy-based TIC agreements for properties of every size and type, and continues to assist in the vast majority of these transactions in California. SirkinLaw continues to improve their documents each month as they encounter new situations and learn more about what TIC arrangements perform best in the real world. They also share our accumulated knowledge, and support real estate professionals and the TIC community, by continuously publishing new articles on their website and offering free educational workshops.
HERE ARE THE TOP 10 QUESTIONS WE GET ABOUT TIC:
1. What is TIC? Why TIC?
2. How is TIC different than a condo or co-op?
3. HowisaTICfinanced?CanIgetmyownloanforaTIC,orisitagrouploan? 4. I’m pre-approved for a loan. Can I use my lender to purchase a TIC?
5. Can I sell my unit? Will I need approval to sell or rent my unit?
6. What happens if another TIC owner defaults on their loan?
7. What happens if another TIC owner does not pay their share of property taxes? 8. Is there an HOA? What is covered on the HOA dues?
9. What are the common expenses and how are they shared and paid?
10. How is title held? Is my name on title?
1. WHAT IS TIC? WHY TIC?
TENANTS IN COMMON units are an alternative to condos. Why not just sell as a condo? Converting
a building to condos is often impossible or too costly. Converting a property into condos, involves subdividing the property (an apartment building with one Assessor Parcel Number or APN) into multiple properties (condo units) each with their own APN. This process of subdivision involves city and state approval.
Another option, is to sell as TIC: sell the apartment building as a whole, to multiple buyers. Each buyer would have a fractional interest in the property, with exclusive occupancy rights to their unit. The value of their ownership would be in their exclusive rights area (how large the unit is, views, upgrades, etc.). For example, if you have a 4-unit building, and sell each unit individually, each owner would have 25% ownership in the property. The nicer unit (upper unit, nicer views, outdoor space, etc.) would be more valuable than a smaller unit, with less desirable upgrades.
TIC sales provide a win-win for both seller and buyer. Because the property is not subdivided, and there are limited TIC financing options, TIC units tend to be priced 10-14% less than comparable condos. TIC
sales offer first-time or entry-level homebuyers and renters an opportunity to enter into the real estate market that they normally wouldn’t have. At the same time, selling each unit individually versus selling as a whole will often produce a higher yield for the seller.
If you’re trying to get into the Los Angeles real estate market, but feel you are priced out, and can’t afford or find anything, TIC units may be the perfect solution for you. Consider a TIC purchase as your way into real estate. A TIC purchase will allow you to get in, start building equity and enjoy all the tax benefits of being a homeowner.
2. HOW IS TIC DIFFERENT THAN A CONDO OR CO-OP?
A TIC unit looks like a condo, feels like a condo, acts like a condo: you can buy, sell and rent your TIC
unit just like a condo. You don’t need to sell your unit concurrently with others, you don’t need permission to sell or rent your unit. There is no group loan, or seller “wrap-around” loan. Every buyer gets their own individual financing or buys all-cash.
There are two main differences between a condo and a TIC unit.
First, a TIC property is not subdivided and has one Assessor Parcel Number (APN). A condo building has been subdivided and each unit has its own APN. A condo owner can walk into any bank (such as Wells Fargo, Chase, etc.) or go to any lender and get a conventional loan. A TIC unit can only be financed by lenders who offer fractional TIC loans. There are a dozen or so lenders in San Francisco offering TIC fractional loans. At the time of this publication, there is currently one lender offering TIC loans here in Los Angeles, Sterling Bank.
The second difference is how title is held. With a condo, there is one grand deed for each individual condo unit. With a TIC building, there is one master Grant Deed, with separate deeds of trust for each unit. The title of a TIC building will list each owners name, with their percentage of ownership in the property. There is a TIC declaration also recorded with title, referencing the TIC Agreement.
Similar to a condo, TIC communities form HOA’s. And similar to condo’s CC&R’s, TIC homeowners all sign and agree to a TICA (Tenancy-in-Common Agreement). The TICA looks very much like a condo’s CC&R’s, and contains a site-plan and floor plan of all the units. The TICA stipulates who has exclusive rights to which unit and areas, and the site plan illustrates what those units and areas are.
3. HOW IS A TIC FINANCED? CAN I GET MY OWN LOAN? OR IS IT A GROUP LOAN?
Yes! You can get your own, individual loan. In the past, the only option for TIC ownership was to either purchase all cash, or get a group loan, or do a seller wrap-around loan. You may do research about TIC ownership online, and read articles relating to these other options. However, now you get an individual loan for a TIC unit. It’s referred to as a “fractional loan” because the lender is loan you money on a percentage of the property, not the whole property.
In the 1990’s, banks started to realize there was a market for TIC fractional loans and started offering them to consumers. Now, they are much more prevalent. There are a handful of lenders in the Bay communities offering fractional loans. One of them, Sterling Bank, has ventured to Los Angeles and is now offering TIC loans here. We are anticipating more lenders in the near future, as TIC sales become more prevalent.
Please note that we are not offering group loans. Many of the negatives that you’ll read online, or hear about owning a TIC unit have to do with group loans. Now that we have fractional lending, there are many more pros than cons to owning TIC.
You can buy a TIC unit either with a fractional loan, or all cash. Sterling Bank is currently the one lender offering TIC fractional loans in Los Angeles.
4. I’M PRE-APPROVED FOR A LOAN. CAN I USE MY LENDER TO PURCHASE A TIC?
No, you cannot. Here’s why: When you purchase a TIC unit, you are purchasing a fractional interest (one
unit) in multi-unit building. For example, if you are purchasing one TIC unit in a 4-plex, you are purchasing 25% interest in that building, with exclusive rights to occupy one specified unit. We call this “fractional ownership” because you are buying a fraction of one building. Most lenders, such as Chase, Wells Fargo, Bank of America, etc. want to loan on 100% of the property, and are not willing to loan on a fraction of a property. In the 1990’s, a few lenders started to realize there was a market for “fractional ownership” up in San Francisco, and started to offer Fractional loans. Since then, more have joined and currently there are a dozen or so lenders in the Bay area offering these fractional loans. Currently, one of these lenders, Sterling Bank, has ventured to Los Angeles and is offering Fractional loans here. We have been working with other lenders, and know that more are on their way.
SIDE NOTE: Your lender may tell you that they can help you with a Tenants in Common purchase. If this is the case, go back and clarify to them that this is a Tenants in Common with exclusive rights to occupancy, and requires a fractional loan. Your lender probably is assuming you are purchasing the property with another friend, partner or family member, and wanting to get a group loan with everyone on the loan, and holding title as Tenants in Common. Make sure they understand that the loan will be a fractional loan. Feel free to conference us on the call, or have your lender call us for clarification.
5. CAN I SELL MY UNIT? WILL I NEED APPROVAL TO SELL OR RENT MY UNIT?
You can buy, sell and rent your unit much like you would a condo. You DO NOT need approval from the other owners in the building to buy, sell or rent out your unit.
SIDE NOTE: You may read online that approval from other owners in the building is needed to sell or rent your unit – this is old information (referring to TIC buildings where there is one group loan on the whole property) and does not apply to the TIC buildings we are selling now. Now that we have fractional loans, you do not need approval from the other owners in the building.
6. WHAT HAPPENS IF ANOTHER TIC OWNER DEFAULTS ON THEIR LOAN?
The beauty of fractional loans is that if another owner defaults on their loan, the lender will foreclose on their percentage and unit only, and the other owners in the building are not affected.
SIDE NOTE: You may read online that if another owner defaults, it will affect the other owners in the building. This is old information (referring to TIC buildings where there is one group loan on the whole property) and does not apply to the TIC buildings we are selling now. Now that we have fractional loans, you will not be affected by the financial obligations of the other owners in the building.
Normally, the follow up to this question is, what about property taxes? See next question, #7:
7. WHAT HAPPENS IF ANOTHER TIC OWNER DOES NOT PAY THEIR SHARE OF PROPERTY TAXES?
With a TIC building, there is one property tax bill for the entire building. The property tax bill is split between the owners of the building, according to the final sales price of each unit. In this way, each owners tax liability is equivalent to what it would be if the property was purchased as a condo – it’s based on the sales price.
The starting point for tax allocation should be the amount that each owner paid for his/her unit. When the property tax is increased as the result of the resale of another unit, the buyer should pay the entirety of the increase. A resale by one co-owner should never increase a non-selling owner’s property tax burden. When property tax increases as the result of some non-sale-related activity by a co-owner (such as an improvement), the entire increase should be paid by the co-owner who triggered the increase. When property tax increases as the result of an increase in the applicable tax rate, or a reassessment unrelated to the action of a particular co-owner, the increase should be allocated according to the percentages derived from the previous purchase prices and improvements.
Unless purchasing all-cash, each owner’s property taxes are impounded by the lender. The HOA will be responsible for paying the supplemental taxes. We recommend our TIC communities retain the financial help of a TIC CPA to manage the HOA expenses (collect HOD’s, pay the HOA bills, and take oversee property taxes).
8. IS THERE AN HOA? WHAT IS COVERED IN THE HOA DUES?
Yes, there will be an HOA. All owners of the TIC units on a property form the HOA. If a new TIC community is forming, when all units close escrow the new owners will get together to create their HOA. The HOA will have a few options on how to manage their new community. They can a) elect to self- manage, b) hire a management company to manage the HOA, or c) self-manage the HOA, and hire a TIC CPA to manage the finances. We recommend this option for smaller TIC communities. We can recommend a CPA in San Francisco who manages finances for TIC communities, and charges $30/month per door.
The HOA dues will cover common monthly expenses (such as gardener, water if there is one water meter for the entire property, pest control service, etc.), a manager fee if applicable, and reserves (if the HOA elects to collect reserves).
9. WHAT ARE THE COMMON EXPENSES AND HOW ARE THEY SHARED AND PAID? Common expenses will vary from property to property. TIC common HOA expenses are very similar to Condo association common expenses. If there is one water line, there will be one water bill the HOA will be responsible for. If there is pest control service, gardener, or other property vendors – this will be a HOA expense.
The HOA will be responsible for all building maintenance repairs and upgrades. Just like a condo, the individual owners are responsible for walls-in repairs and upgrades within their units (exclusive use space). For example, if there is a roof leak, the HOA would cover the repair. If there is a problem with a unit’s heater, the owner would be responsible for that.
The HOA expenses are divided among the owners based on the square footage of each unit. The larger the square footage of a unit, the higher the percentage that owner will have on common expenses. This is outlined in detail in the TIC Agreement.
10. HOW IS TITLE HELD? IS MY NAME ON TITLE?
Yes, your name will be on title as 25% owner of the property. There will be a memorandum recorded with title referencing the TIC Agreement. TIC Agreement will stipulate which unit and part of the property you and the other owners have exclusive rights to.
Title is held in the names of the individual owners. There is a master Grant Deed with everyone’s name on it, and individual deed of trusts for each owner indicating the percentage of ownership.
MORE FROM THE RENTAL GIRL ON TIC OWNERSHIP:
- Read more about TIC ownership HERE
- View all our current TIC offerings HERE
- View The Rental Girl’s current properties for sale HERE
- Visit Andy Sirkin’s website for more research on TIC sales HERE
(Andy is the TIC attorney who pioneered TIC sales in the early 80’s in San Fran. His website has a wealth of info on TIC ownership).
- Interesting in purchasing a TIC? Contact an experienced TIC Realtor®
Elizabeth McDonald, Broker & TIC Specialist
TRG Realty Company, Inc.
The Rental Girl
323-313-5780 / Cell
BRE Lic #: 01449897
ABOUT THE RENTAL GIRL & HOW WE GOT INVOLVED WITH TIC:
The Rental Girl (therentalgirl.com) is a full service Real Estate brokerage specializing in residential leasing and sales. We have been serving renters and landlords since 2004. We work with thousands of Los Angeles renters each year, and many of these renters are qualified to buy, but can’t afford or find a home in a neighborhood they want to live. In 2016, a client of ours introduced us to TIC ownership and we saw immediately how many renters and entry level buyers in LA could benefit from a TIC market here. We met with Sterling Bank, who was working actively to pioneer a TIC market in LA, and other San Francisco vendors. And so began our research on TICs. Since then, we have helped bring many TIC units to the market, and we have many new TIC communities coming soon. With every new TIC building that hits the market, more renters, landlords and realtors are discovering TIC sales and the TIC movement is growing rapidly. We love to share our accumulated knowledge, and support our real estate colleagues, landlords and renters and the TIC community.