Comparing Large and Small TICs
Big TICs Have Fewer Problems Than Small TICs
The assumption that large TIC groups are more risky and problematic than small ones represents an oversimplification of a number of complex issues. From the standpoint of group relations and property management, large groups actually have significant advantages. It turns out that the groups with the most difficulty making decisions, and the highest incidence of disputes leading to mediation and arbitration, are two-unit TICs. (The same is true of two-unit condominium buildings.) As the buildings get larger, the likelihood of a disputes diminishes. The maintenance burdens, and the risks associated with unexpected repair costs, also diminish as buildings get larger because the costs, while slightly higher, are spread out over more owners, and economies of scale lower the cost-per-owner.
Financing and Condo Conversion Are Easier For Small TICs
On the other hand, both financing and the condominium conversion process are more problematic in larger buildings. Financing is more difficult because larger TICs really need individual TIC financing, while smaller ones can get by with either individual or group financing. Condominium conversion is more difficult because buildings with more than two residential units must either qualify for the condo conversion “amnesty” program in effect from 2013-2020 or win a lottery that will not resume until at least 2023. Moreover, buildings with more than four residential can never convert unless they qualify under the “amnesty” program.
Converting a TIC to a Condo May Be Overrated
But it is important to keep the condominium conversion issue in perspective. Buildings with more than six units have not been able to convert to condominiums since 1980 and, although 5-6 unit buildings could theoretically convert under the lottery system, only one or two have successfully qualified for conversion in an average year. Despite these conversion restrictions, TIC units in these buildings have held their value through all the ups and downs in the real estate market, and are even more valuable now that separate financing is available. (It is also noteworthy that there are actually more lenders making individual TIC loans in large San Francisco TIC buildings that there are making individual loans in San Francisco coop buildings.)
Buildings of four or fewer units have a realistic chance to convert, but are generally more expensive. This raises the question of whether the value added by conversion justifies the cost and effort. For two-unit buildings, which can convert automatically after one year of owner-occupancy, this question is very difficult to answer. Current sale statistics show little or not difference between TIC prices and condo prices in duplex buildings. For 3-4 unit buildings, there is clearly a significant condo versus TIC price differential (probably 10-20 percent), but most of these building must be owner-occupied for 10-12 years before they win the condo lottery. The long owner-occupancy requirement makes the true odds of conversion low, with the result that paying extra for a TIC in a 3-4 unit is probably not justified by the true odds on benefitting from a conversion.
About the Author
D. Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership 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.