TICs, San Francisco’s Involuntary Reflex: Part 1

Inconvenient and Ugly

A tic is an involuntary and habitual muscle spasm, frequently in the face.  If you live in San Francisco, a TIC is also what many people end up with when they buy a flat in one of San Francisco’s classic 2-4 unit buildings.  Like the medical condition, TICs are inconvenient at best and can be downright ugly at worst.

TIC stands for “Tenancy-In-Common,” a form of legal title by which multiple owners take title to a single property.  In San Francisco, this form of taking title has come to be used as an end-run around the City’s restrictions against converting multi-tenant buildings into condominiums.

When you buy a condominium, you’re basically buying your particular unit and that’s all. But when you buy a TIC interest, you’re buying an interest in the building as a whole, along with your other TIC owners.

Lawyering Has Its Limits

Why does it matter?  Because buying a roof over your head is expensive.  Most of us need to borrow money to do it.  And the major disadvantages of TICs over condominium ownership relate to financing issues.

  • When you buy a condo, you get a loan on your unit and that’s all.  If you don’t pay your loan and the bank forecloses, they have the right to sell your condo to get repaid, but they don’t have the right to sell the building the condo is in.
  • But when you buy a TIC, in the vast majority of cases you and your co-owners become co-signers on a loan for the entire building.  You qualify for the loan together and you are “on the hook” together for repaying it.  If one of the co-owners stops paying his share of the loan and the others don’t feel inclined to make up the difference, the bank has the right to sell the entire property at a foreclosure sale.  That itself would be enough to give many prospective buyers a twitch or two.
  • There are a few banks that will finance separate TIC interests.  This pretty much puts the TIC on a par with a condo.  But interest rates are higher than on a regular condominium loan; and the building itself needs to “qualify” for the program.  Also, although these kinds of loans have been around for a while and seem to have survived the credit crunch, there’s no guarantee that they’ll continue to be around.
  • Selling a TIC interest can also be more difficult than selling a condo. If the lender doesn’t permit the buyer to take the seller’s place as a co-signer on the loan, the owners may be forced to take out a new loan to accommodate the new buyer.  If the lending environment isn’t good, that can kill the sale.  Or the bank can use the sale to try to extract better terms for itself.

It’s true that clever lawyers – and I say that without any irony – have developed legal structures to mitigate these risks.  Andy Sirkin and Andrew Zacks are two prominent attorneys who specialize in this stuff.  (See their websites for excellent in-depth material on TICs.) But TICs remain inherently riskier and more complicated than condominiums, and no amount of legal engineering can fix that.

Tomorrow we look at the market data for TICS and condos.

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