For those looking to purchase a home in San Francisco, there is a good chance of coming across a TIC property. In short, TIC’s are an alternative form of ownership to a condominium in the San Francisco real estate market due to the city’s restriction on a condo conversion.
TIC stands for “tenancy in common” which is a legal form of co-ownership, and in San Francisco, it also refers to a property subtype. It describes a co-ownership that assigns each co-owner exclusive rights to occupy a particular space within the co-owned property. TIC ownership is paired with a TIC Agreement that creates a mock subdivision and basically defines the exclusive usage rights for each co-owner.
Most simply put, apartments in a multi-unit building that cannot be legally divided into condominiums can be sold separately as TIC units.
In 1979, San Francisco imposed the rent control ordinance on apartments so those who worked in the city could afford to live there. Apartment buildings began converting to condominiums to avoid rent control thus eliminating available rental units. Soon after, the city restricted the number of apartments converting to condominiums using a lottery system.
The lottery system restricted the number of conversions to 200 units per year. Qualifications to enter the condo lottery included: meeting owner-occupancy requirements, having no prior eviction history, and only buildings that were 3–6 units. Two unit buildings with no prior eviction history were (and still are) exempt from the lottery, thus making them more valuable. By the mid-1980s, limiting the supply of inventory drove condominium prices higher. To circumvent the city’s restriction on condo conversion, TIC’s emerged as an alternative to a condominium.
As of 2013, new legislation suspended the condo lottery for a minimum of 10 years. During this time a backlog of buildings will be expedited through the condo conversion process, and the city is not allowing new applications for the condo lottery.
Three Main Differences Between TIC’s & Condominiums
Condominiums: are on record as individual parcels of property, therefore act as a single-family dwellings. Owners hold title to their individual unit privately.
TIC’s: the city recognizes the building, not the individual unit, therefore each co-owner owns a shared percentage of the building, and the co-owners will share the title together. Ownership is accompanied by a TIC Agreement that defines each co-owners exclusive rights.
Below is an example of a 4-Unit Condo Building, and a 4-Unit TIC building with each co-owner having a 25% interest in the building. The condo building shows each owner holding the title and full ownership of their unit. The TIC building shows one title on the building and each owner holds 25% interest.
Title Percentage Vs Base Percentage in a TIC
There is a common question about Title Percentage in a TIC property, and its effects on what you own and what your responsibilities are. The answer is found in the TIC Agreement, and the answer is no it has no bearing on what you own and what your responsibilities are. It does not determine the allocation or usage rights of the common area or obligations to pay expenses.
Interpretation of Title Percentage frequently gets confused with the Base Percentage: the factor used to determine any shared expense or cost that is not explicitly outlined in the TIC Agreement.
Condominiums: conventional home loans are widely available.
TIC’s: do not qualify for conventional financing, because they are not individual parcels of property. A conventional lender cannot loan on a percentage of a multi-unit building, like in a TIC property. There are two types of loans:
- Group Loans: Before fractional loans became available, the only way to finance the purchase of a TIC unit was to share a group loan with the other co-owners. This is the type of loan that made TIC’s very risky and gave TIC’s a bad wrap. If an owner stops making monthly payments, the other co-owners are liable and might be at risk of foreclosure. It can also be tricky to buy or sell because the co-owners have the first right of refusal to approve the new prospective owner.
- Fractional TIC Loans: a niche concept within the city of San Francisco, allows each owner to have their own separate loan with no responsibility for the mortgages of the other co-owners. Therefore if an owner defaults, the lender will get foreclose on that unit without impacting the other co-owners. In addition to alleviating the risk of a default, the fractional loan also alleviates the first right of refusal. So owners can buy and/or sell without involving the co-owners.
Group Loans have subsided, and Fractional Loans have become the norm for TIC financing. Because this is a special loan used within San Francisco, there are only a few lenders that offer TIC fractional loan options.
While 30 year fixed mortgages are available for conventional loans, they are not available for TIC financing. Options usually include 3, 5, or 7 year ARM (adjustable-rate mortgage) loans. Meaning the loan is fixed for the initial term, then can adjust afterward. Interest rates are often higher, though rates have become more attractive throughout the past year (2019–2020).
Questions to ask yourself: Do you plan on living in a condo, TIC, or multi-unit building for 5 years, 10 years, or 30 years? Does your vision include a single-family home in the future?
Fractional TIC lenders include Sterling Bank, Bank of Marin, National Cooperative Bank (NCB), Bank of San Francisco, and Patelco Credit Union.
3. Property Tax
Condominiums: the property tax bill is the sole responsibility of the homeowner(s).
TIC’s: because TIC’s do not appear separately on city records, the property tax bill is issued for the building and is divided between the owners on the basis of what each owner paid for his or her unit. The assessor's office will not accept a partial payment, it must be paid in full. Therefore if one co-owner does not pay, then the other co-owners are responsible for the full property tax bill.
Some TIC Agreements will require each owner to maintain two months of property tax payments into a Default Account. There are other repercussions for missing payments including a forced sale, and foreclosure.
Similarities of TIC’s & Condominiums
The homeowner(s) will use and occupy a unit within a multi-unit building in addition to their exclusive parking, decks, yards, etc (if applicable). Both have an HOA to manage the budget, expenses, updates, maintenance, and repairs. Decisions are made by majority vote. Both appreciate and depreciate with market conditions
Pros & Cons of a TIC
Pro: TIC’s can sometimes be found at a 10–15% discount to a comparable condominium. This is in result to the cons of sharing title, property tax, and limited financing options.
Pro: Two-unit buildings have the most upside. If there is no prior eviction history and after 12 months of owner occupancy, the owners can meet the city building requirements to perform a Fast Track Condo Conversion. Then enjoy the values of owning a condominium.
Con: Because TIC’s are apartment buildings, often constructed before 1979, they fall under the city’s severe Rent Control and Eviction Control laws. Meaning if you decide to rent out the unit, you can only raise the rent a small percentage once per year, and it might be very difficult to evict the tenant.
That’s a Wrap
Every TIC is different just like every Condominium is different. It’s imperative to do the research and due diligence to satisfy yourself with the property. TIC’s may require a little extra education, but in return may be a great fit for prospective buyers to enter the San Francisco housing market.
In my experience, buyers don’t enter the market looking for a TIC. During their home search, they find the perfect home, and it happens to be a TIC. Because TIC’s are a niche San Francisco concept, a local San Francisco agent will often be best suited to guide a prospective home-buyer through the in’s & out’s of a TIC purchase or sale.