Are TICs Good Home-Buying Investments?
How did TICs perform during the real estate slump?
Although tenants in common are not as well-known or as well-established as other home-ownership options, they have proven remarkably resilient during the recent down cycle in home prices and sales volume.
“TICs are the only growth category, “ say Bonnie Spindler, a top agent as Zephyr Real Estate in San Francisco. “People are less willing to stretch and want to buy less. Tenancy in common is a less-expensive way for them to fulfill their needs in terms of amenities and location.”
This optimistic view of the TIC market was echoed by Anthony Kutsos, an agent will Brown & Company, also in San Francisco. “TICs are doing pretty well,” say Kutsos. “There are still a lot of buyers out there and they are more open than ever about buying as tenants in common. They seem to be more willing to move on TICs than on other product types.”
Still, current market conditions are demanding, and having the right unit at the right price is just as important in the TIC sector as in other market sectors.
“Buyers are really kicking tires, and this means it takes longer to ratify contracts and longer to close,” notes Tim Brown, the broker at Brown & Company. “Units that are on a busy street, lack parking, or have been badly remodeled are very difficult to sell in this market, and must be priced aggressively. Studio units can be difficult to sell, as can units in peripheral areas. Still, TICs are moving faster in general than other offerings.”
“I’m seeing a lot of strength at the top and the bottom of the market in terms of price, with more weakness in the mid-price range”, says Spindler.
In addition to their lower pricing, TICs are benefiting from a generally favorable lending environment. “There have been fewer financing issues with TICs, and rates have remained attractive” notes Spindler.
“The loans are definitely important,” says Kutsos. “Buyers are insisting on fractional financing now. Before, more buyers were willing to accept group loans.”
Pat McCarty, Senior Vice President with Circle Bank, one of the market leaders in individual TIC financing, confirmed that Circle remains committed to offering TIC loans, and that the volume of loan originations has not dropped over the past twelve months. “These have always been portfolio products, which means that they are somewhat more insulated from market pressures,” say McCarty. “We also use a lower loan to value ratio, meaning there is less exposure to market adjustments. And we have not had any delinquencies, defaults or foreclosures on TIC loans.”
Despite the generally rosy picture on TIC lending, anecdotal evidence suggests that underwriting procedures on TIC loans has toughened. “Sometimes the first appraiser will bring in a second appraiser,” say Spindler. “Everything is taking much longer to close.”
Is it possible to do a unit-assignment type TIC on commercial property?
Commercial TICs with unit assignments are not only possible, but becoming more common. The fastest growing sector of this commercial TIC market seems to be medical office buildings. The doctors that occupy these buildings are delighted to have an opportunity to purchase them, and to use their monthly payment to build equity rather than for rent. These professionals rarely relocate, making ownership an excellent option. In addition, these TICs are popular for general-use office buildings, storage facilities, and industrial properties.
In all these cases, owners are opting for unit-assignment TIC formation, rather than for condominium subdivision, because local law makes subdivision impossible, overly costly, or very time-consuming. Selling TIC interests does not require any local governmental approval. Also, all-commercial buildings are exempt from state approval requirements regardless of their size. Note that this exemption does not apply to mixed-use buildings with both residential and commercial units.
Commercial unit-assignment TICs have much in common with their residential cousins. Under the TIC agreement, each tenant in common owner has the exclusive right to occupy a specific unit or suite. The owners maintain their own spaces and have the right to alter and improve them. They pay dues to an owners association for common area maintenance and management.
The primary weakness to TIC marketing of commercial property is the lack of readily available individual financing. Although several lenders have originated fractional financing for all-commercial TICs, the number of projects financed in this way has been limited. If individual financing is not available, the TIC purchases are financed with all-inclusive (wraparound) individual loans, seller financing, or group loans. All of these options have disadvantages compared with institutional fractional financing, and a prospective seller must weight these disadvantages against the expected pricing premium from a TIC sale.
About the Author
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. This unmatched level of experience allows us to offer time-tested approaches for the vast majority of co-ownership situations, to quickly and effectively solve problems, and to produce documents that are clear, easy to navigate and read, and efficient and cost-effective to enforce. We continue to improve our documents each month as we encounter new situations and learn more about what TIC arrangements perform best in the real world. We also share our accumulated knowledge, and support real estate professionals and the TIC community, by continuously publishing new articles on our website and offering free educational workshops.
Our tenancy in common practice involves general advice and counseling, TIC agreement preparation, loan documents, and ongoing consultation to developers, seller, Realtors and TIC owners, on either a flat fee or hourly basis. We have a well-deserved reputation for returning calls promptly and providing fast turnaround times. But more important, we are known for finding creative solutions, calming fears, and finding common ground, so that transactions and relationships work. Although our role usually begins at the time the tenancy in common is first formed or sold, we are committed to remaining available to solve problems throughout the life of each TIC. Contact us via our contact form.