As predicted in my last article at the end of 2010, the tenancy-in-common market has once again started to pick up some steam during 2011, after a slow 2010 compared to previous years. A year ago, I noted larger projects were having more trouble selling than smaller ones, with both total sales volume and the total number of TIC sales down dramatically compared to previous years. However, the TIC market appears to be changing.
LOOKING BACK
For those of you who have not been tuned in to the evolution of the TIC market over the last decade, the following will provide you with a brief recap. All the way back to the late 1970s and early 1980s, the housing market in San Francisco has suffered from an extreme lack of owner-occupied units. Many buyers who considered single-family homes unaffordable and found condominiums at low supply and a steep premium began purchasing 2-6-unit buildings as co-tenants. They would share a group mortgage secured by the entire building and each own an undivided interest in the building, with an exclusive right to occupy a particular unit. These TICs would be governed by a TIC agreement (with a similar goal and structure to CC&Rs in a condominium project), and these agreements have evolved over time. This trend of buying a TIC as a condo alternative continued, gaining momentum every year. TIC sales volume saw a major increase from less than $100 million in 2002 to over $250 million in 2004.
In 2005, the first fractional TIC loan closed escrow, allowing buyers to purchase their own units, with their own loans, secured by their own deeds of trust on the individual percentage interests owned in the building. In turn, more buyers, including those purchasing with more cash, felt comfortable purchasing TIC units within multiunit buildings knowing that they had more liquidity in their investments and the ability to sell without forcing a refinancing of the entire building, which had been the case since the inception of the TIC. At that time in the 1970s, your typical TIC buyer was purchasing a building with one to five other partners (sometimes without any TIC agreement at all) and sharing the costs associated with a group mortgage. When it came time for one of these co-tenants to sell, the rest of the co-tenants would generally have to refinance their loan, sometimes at higher interest rates, making it much more difficult to sell an outgoing co-tenant’s percentage interest.
Today, we still see these existing group loans from days past, which pose quite a challenge when a single co-tenant wants to exit and the others want to stay in their property. Several times each year I am contacted by individuals, groups and attorneys specializing in tenancies in common, who are trying to figure out a way to fractionalize their TIC to allow a co-tenant to sell their share without a negative impact on the other co-tenants in the building. Sometimes it is possible, and sometimes it is not, depending on their equity positions (but that is a story for another article).
By the time we wrote our first article for SF Apartment Magazine at the end of 2007, the sales volume had skyrocketed to nearly $500 million, with 724 TIC units sold that year. These numbers were double those from just three years prior. A hot market, few condo alternatives and good availability of the new, more secure fractional financing helped propel such dramatic levels over such a short period of time. This was a record-breaking year for the TIC market, and still holds the all-time TIC sales and volume records.
These 2007 numbers suffered a hit with the rest of the real estate market in 2008 due to the impact of the subprime mortgage lending meltdown. In 2009, sales of the total number of units were similar to sales in 2004, and these years also had similar sales volumes ($245.5 million in 2009, compared to $239.4 million in 2004). Even despite the lower numbers, the TIC market was still running at a much stronger and more efficient pace than it is today. As indicated in my article last December, the difference in marketability of these units, and the financing which went along with them, had dramatically changed in the five-year period between 2004 and 2009, and the TIC market probably would have continued its strong gains post-2007 had it not been for the fact that financing dried up so quickly at many different levels of lending. Since 2007, we have not seen any new lenders step into the arena of fractional TIC lending and have been left with only two to three solid lending options, some of which tend to pull back on lending and then step into the market again depending on the availability of funds to lend on this specific niche program.
At the close of 2010, 272 TIC units had changed hands at a total sales volume of $157,312,119, according to San Francisco’s Multiple Listing Service. This was down considerably from the 2009 numbers referenced above. Overall sales activity was also down, but TICs had taken a greater hit than condos and homes, as a result of lower interest rates on 30-year fixed loans on single- family homes and condos. Rates were one to two percentage points higher on TICs, with only 3-, 5-, and 7-year fixed loan options available. With slower anticipated appreciation, buyers had started to desire 30-year fixed loan products more than at any time in the past 10 years, which is part of what resulted in the TIC slowdown of 2010.
LOOKING AHEAD
Some bright news for the TIC market seems to be surfacing, however. As of October 14, 2011, 259 TIC units have traded this year, at a total sales volume of $173,479,458. This total sales volume has already surpassed that of the entire 2010 year and, based on inventory both active and in escrow, the total number of sales will surely pass the 2010 numbers by the end of this year. Some of the increased activity can be attributed to the fact that the existing fractional lenders for TICs have lowered their interest rates since the same time last year, to complete with the already low rates on condominium and single-family home loans. As of yet, no 30-year fixed loan has surfaced on the TIC front, which if made available would definitely help increase both numbers of total sales and overall volume.
Between January 1, 2011, and October 9, 2011, 256 TIC units traded in San Francisco, with an average sales price of $671,092. The lowest price was for a TIC unit located on Wool Street, which traded at $115,000. This was more than $3 million less than the high, located on Pacific Avenue, which traded for $3,185,303. The largest number of sales of tenancy-in-common units was found in the Inner Mission neighborhood. Average time on the market during this period was 86 days. This is in sharp contrast to the same market indicators last year. In 2010, during the same time period of January 1 to October 9, only 218 TIC units traded in San Francisco, with an average sales price of $581,163 (almost $100,000 less than this year). The lowest priced sale in 2010 was on Natoma Street in the South of Market neighborhood for $189,000, compared to the highest sale on Greenwich Street, which sold at $2,195,000. Average DOM during this period was 99 days, 14 days longer than YTD 2011.
As with this year, the largest number of TIC units traded was in the Inner Mission. That being said, there has actually been a huge change in the neighborhoods in which TIC units are most desired. Although TICs started in the middle of the city, where there is a greater stock of multiunit housing, sunnier weather and easy access to public transit and freeways, we have noticed a trend over the last five years of TICs starting to grow to the northern end of town. Pacific Heights, Russian Hill, North Beach, Cow Hollow, the Marina and other northern neighborhoods became hot spots after fractional financing surfaced back in 2005. It appears that the buyers downsizing out of larger single-family homes and purchasing north of California Street were much more reluctant to get into those group loans that existed back in 2004 and now feel much more secure moving forward with the purchase of a TIC unit for use as a pied-á-terre or secondary residence.
Many buyers purchasing TIC units recently have purchased with cash. These buyers are less affected by the thought of the initial fixed-rate period expiring, and therefore see better value (typically 15% to 20% less than comparable condominium units) in buying a TIC.
Also, there has been very little default among fractional TIC owners. Only a handful of units have been taken back by lenders of fractional loans, mostly located in buildings in which units were sold at the top of the market for prices that could not be sustained during the downturn, and where the owners found no other choice than to default on their interest in the building. Unlike years past, where we had not seen a fractional loan foreclosure, we actually have seen these units go back to the lenders and most of them have been successfully resold to new buyers almost immediately following foreclosure. This speaks well to lenders’ previous concerns that they may not be able to properly “perfect” the foreclosure process on these units and may get stuck with them in inventory for years after a notice of default is recorded. This simply hasn’t been the case, and hopefully as other lenders take note they will become less reluctant to lend on TIC units, knowing that their lending position is nearly as secure as that of a condo or single-family home lender.
Now that the kinks of the foreclosure process have been worked out, and demand is starting to once again increase, we expect that 2012 will continue to see a slow but steady rebound in the TIC market. Volume and sales for 2012 are expected to surpass the numbers of 2011. There is pent-up demand for well-priced, well-located projects and, as they did before, developers are likely to seize the opportunity and move forward once again. We expect they will open up the pipeline for new TIC projects, which had become fairly stagnant since 2008. Developers who saw construction financing (which they had typically used to finance construction on larger projects) dry up at a fast pace, now find that several lenders who stepped aside are back in the arena with these loans, making it possible for owners to once again escape the perils of rent control and sell their units to individual buyers in order to maximize on their most important investments. Though it will take some time to recover levels of activity similar to those of 2007, more lenders and buyers are taking note of the activity levels and the fact that this type of ownership was able to handle such tough times in the sales market and lending climate with minimal impact.
TICs are here to stay for the long haul. All that is separating these units from gaining a near “condo” status (and sales/volume) is a lender willing to take on a 30-year fixed loan product, which would allow the flood gates to open and for more additional affordable home ownership opportunities to be created. San Francisco desperately needs more owner-occupied units to help fill the void on our tax rolls created by 30-plus years of stringent rent control, which has kept the sales market hot with low inventory and also low returns to our city coffers due to a lack of owners paying property taxes on their units. With a different political climate, lending markets beginning to open up once again and many new buyers looking for home ownership opportunities, now is San Francisco’s time to shine. TICs are the way to make it shine brighter than the rest.
ABOUT THE AUTHOR
Jesse E. Fowler, a San Francisco native, specializes in marketing TIC developments, single-family homes and multi-unit properties. He is with Brown and Co. Real Estate and can be reached at 415-648-5800.
