Individual TIC Financing
Types of TIC Loans
TIC owners have title to percentage shares of a single property rather than particular units or homes. Historically, the only bank financing available for tenants in common owners was a traditional home or apartment loan on which all owners would act as co-borrowers, and which was secured by the entire property. This type of collective financing exposes each owner to the risks associated with another owner’s non-payment. These risks can be managed and minimized by careful TIC structure and good documentation, but cannot be eliminated so long as the group shares a single loan.
Separating Each Co-Owner’s Mortgage
Individual TIC financing is separate loans for each fractional owner. Each loan involves a note signed only by the owner of a particular fractional interest, secured by a deed of trust covering only that owner’s tenant in common share. If a particular owner defaults on his/her loan, the lender can foreclose only that owner’s share. The foreclosed share is then sold, and the buyer acquires the defaulting owner’s interest. Unlike with group financing, none of the other tenant in common owners are affected by the default or foreclosure.
The Difference Between TIC Loans and Condominium Loans
Individual TIC financing is not the same as individual condominium financing, and does not turn a tenancy in common interest into the equivalent of a condominium. Since a TIC owner does not have title to a particular unit, an individual TIC loan cannot be secured by a particular unit. So just as tenants in common owners rely on a contract (the unrecorded TIC Agreement) rather than a deed for their right to occupy a particular apartment, TIC lenders must rely on that same contract rather than their trust deed to guarantee that they will be able to deliver those same occupancy rights to a foreclosure sale buyer and thereby generate enough sale proceeds to repay the defaulting owner’s debt. The inability to secure individual TIC loans with particular units makes TIC loans more risky for the lender than condominium loans, just as TIC ownership is more risky for the owner than condo ownership.
Is Fractional Financing New?
Individual TIC financing is not a new concept. Private lenders, especially sellers of tenant in common interests carrying a portion of the sale price to supplement a buyer’s down payment, have used individual notes and trust deeds successfully for at least 20 years. More recently, developers of fractional vacation home projects have offered individual bank financing. Individual TIC financing is also created automatically whenever title is held by multiple owners but only one of those owners signs the trust deed, a situation which has occurred with sufficient regularity to create a body of law related to foreclosure on partial interests.
The spate of recent publicity and excitement over this financing resulted from the announcement by several local banks that they were either offering or considering individual financing for co-owner-occupants of apartment buildings. These announcements are a natural response to the growth and maturity of the TIC market. Banks can now look back at over 20 years of significant tenancy in common activity for statistics on defaults and resales, and this record provides assurance that TIC projects do not present significantly greater risk than other types of home lending, and probably present less risk than apartment loans to investors. In addition, Banks recognize that the growth in the TIC market, particularly for buildings of 5-30 units, creates an enormous volume of potential loans and increased profit.
Market Affect of Individual TIC Mortgages
The TIC market has experienced explosive growth over recent years, and the potential availability of individual loans will certainly accelerate this growth, particularly for building containing more than 10 units. But uncertainty about the availability of these loans will moderate their market affect, at least during the next 6-18 months. Beyond that point, if individual loan availability develops and expands as expected, the affect on the tenants in common market, homeownership demographics, and ultimately, San Francisco housing policy, is likely to be dramatic. In fact, it is not wildly optimistic to believe that the increasing popularity of tenancy in common ownership, coupled with widespread availability of individual financing, could finally create the conditions required to end the disastrous rent control/anti-growth housing policies that have plagued San Francisco for the past 25 years.
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.