To TIC, or Not to TIC…

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There’s an increasingly popular form of ownership these days, called a TIC, or “Tenants in Common.” It’s been around for ages, really – holding title as “Tenants in Common” is one of the most popular ways to hold title – for example, if you were to buy a house with a friend, you would most likely choose to hold title as Tenants in Common, each owning perhaps 50% of the property, but you would each have access to the entire property.

Nowadays, there’s an increasingly popular form of TIC ownership, where you buy a portion of the property, but you get exclusive use of just a section of it. This has been happening in San Francisco for a long time, where people would buy into a large Victorian home. As part of the purchase, they sign a TIC agreement which grants them exclusive use of one bedroom, and allows them unfettered access to common areas, like the kitchen, bathrooms, living room, etc.

I have yet to see that kind of TIC project here in Santa Cruz, but something we are seeing more of is subdivision of, say, a four-plex into a TIC property. Normally with a four-plex, there is one APN (Assessor’s Parcel Number). Any number of people might have an ownership interest in the parcel, but without a separate TIC agreement, all owners would have equal access to the property. Now what we are seeing is that some multi-family properties are being turned into de-facto condominiums via TIC agreements.

It’s difficult to turn a multi-residential building into a condominium – we haven’t had an apartment-conversion project here in Santa Cruz in quite some time, I suspect because the cities and county are no longer allowing it. When an apartment complex is converted to condominium use, it goes from a single APN to multiple APNs, with a separate parcel number for each unit. The owners of the units are also given easements to use common areas, like the parking lot, etc.

With a TIC agreement, the property remains a single parcel, and people who buy into the property become “Tenants in Common” with the other owners of the property. Per the TIC agreement, each owner is given exclusive use of a portion of the property – e.g. in a four-plex, each owner would have exclusive control of one unit. As with a condo, the owners all have to pay some kind of HOA (Homeowner’s Association) dues, which goes for fire/earthquake/liability insurance and exterior maintenance (painting, groundskeeping, roof, etc.).

So really, a TIC is in effect much like a condo…except when it comes to financing. I have some clients who are looking to buy a place here in Santa Cruz, and they were interested in one of these TIC projects that are currently on the market. They were leaning towards making an offer on one of the units, but then their mortgage broker brought some bad news: the down payment requirements for TICs are higher than for a house or a condo, and the interest rate is also higher, by about 1.5%.

When I go looking at property, the first thing I look for is reasons not to buy the property. Foremost in my mind is, “Are my clients going to be able to sell this property when they need or want to?” I look for anything that would make a property hard to sell, and I point these out to my clients. We actually looked at a couple of different TIC projects, and they were both beautiful. There were eight units in total; two were in escrow, and six were available. Both projects were in the Seabright area of Santa Cruz, which is a popular neighborhood near the beach. Why were these units still on the market?

To twist a cliché: it’s the financing, stupid. My clients wouldn’t have any problem with the down payment, and they could have handled the higher interest rate. That wasn’t the big issue. The big issue was, how do they get out of the property? The financing is a big turn off, and bars a lot of would-be buyers from writing up offers on the property.

So, they’re taking a pass on the TIC for now. If you’re interested in buying into a TIC, I think that’s fine – but make sure the price you pay reflects the difficulty you and other buyers will face in getting financing.

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