TIC's and New Legislation
Many people who begin to look at real estate flirt with buying a TIC (tenancy in common). After all, when you're there viewing the property, it kind of seems the same. Looks like a condo, feels like a condo...and it seems like you can get *so* much more for your money. But of course TIC's come with their own risks, and with the new TIC laws, the divide has widened. Recently, Andy Sirkin, the expert on TIC's, held a seminar for Zephyr on how the new legislation will go down. i.e.: Who can convert and when? Who *can't* convert? How does this new law affect people currently buying TIC's? The new law is incredibly complex, and if you're thinking about buying a TIC, it's more important than ever to understand the restrictions and limitations.
This is quite a detailed article from Andy Sirkin about the new law.
Here are some things to think about regarding TIC's in general, and the new law in particular:
What is different about a TIC? When you buy a condo, you are buying a specific deeded unit, that is plotted on a map and clearly defined. When you buy a TIC, you're buying a % share in a whole building. While in day to day practice, many aspects of owning a TIC may be similar to a condo, the risks and the financing are really quite different.
Financing a TIC. Financing a condo has a few challenges, but generally you can get a conventional loan, fixed rate loan. A loan for a TIC comes in a few different flavors, none of which are fixed. Instead, you'll be looking at a 1, 3, or 5 year adjustable rate loan, with a down payment of at least 20%, and a higher interest rate than you would generally find on a conventional loan. In addition, only a few banks will do these loans for TIC's, known as "fractional financing." The most popular is Sterling Bank.
Risks of Owning a TIC. Or: risks of owning a building with a bunch of other people. With a condo, if someone in your building defaults on their loan, gets foreclosed on, etc., it will only impact the building to the extent that this person pays their HOA dues, and that a foreclosure could affect the values of the other units. While fractional financing (as opposed to a group loan) means that the whole building will not be foreclosed on, there are some other risks. Should someone have a lien placed on them and their property, this will affect the whole building. So, for example, if someone hadn't paid their property taxes, or had a judgement against their property because of unpaid income tax, this then becomes an issue the whole building is responsible for.
The other downside to owning a TIC is that they don't *usually* show as great of appreciation as condos. The pool is smaller for people who qualify for financing, and who are willing to assume some of the above risks.
What This New Law Means. For a long time, people have gone into TIC ownership hoping to condo convert. The building would enter a lottery, and should your lucky number be chosen, the building could then convert to condos. When this happens, frequently the value of the property immediately jumps. (Not that there aren't significant costs in condo converting, of course). But with this new legislation, anyone buying a TIC with three or more units should basically assume you will *not* be able to convert. Currently, the new law says there will be a ten year freeze on the lottery (could be longer or shorter), but you should definitely assume you will not be able to convert.
*Note: Two unit buildings have been able to bypass the lottery system and convert to condos after one year (as long as they meet owner occupancy requirements). For now, this is unchanged, making them still by far the best bet if you're going to be purchasing a TIC.
Oh, TIC's. Yet another uniquely SF thing for buyers to consider. If you have questions about TIC's, condos, real estate or how to start this whole process, you should get in touch. Happy to answer any questions.
