Tenancies In Common (TIC) are very popular throughout San Francisco and are always a hot topic at city hall, in real estate law offices, with the SF Board of Realtors, and with buyers and sellers of TIC’s or multi-unit buildings.

Over the last couple years, we’ve seen outrage from tenant rights groups, change in the way banks finance such property, change in law in regards to converting TIC’s into condominiums and the price of TIC’s skyrocket. I get questions each week from clients and interested folks trying to gather more information about how to purchase such a property and whether or not it makes sense.

First, a couple definitions:

In SF, a TIC is: a 2+ unit property that is owned by the entire TIC group in percentage shares and a detailed written agreement describes each TIC member’s rights and duties, including exclusive rights to use and occupy particular dwelling units along with assigned storage, parking and decks. (This is from the attorneys, Goldstein, Gellman, Melbostad, Gibson and Harris) .

A condominium is: an individually owned unit including the space within the walls, floors and ceilings of a dwelling, plus shard ownership of the remainder of the property, known as “common areas.” Owners pay monthly dues to their HOA to cover common repair and insurance expenses, but pay separately their individual mortgages, property taxes and utilities. (Goldstein, Gellman, Melbostad, Bibson and Harris)

The goal of most TIC owners is to convert their shared interest into a condo. This typically increases the value of the unit and it also limits the liability of the owners to their particular share. TIC owners all share a loan, thus default by one member creates a hardship on the others’.

To convert a TIC into a condominium, the owners of the building must first reach certain guidelines, then enter into a lottery (if there are more than 2 units in the building). The city has an extensive outline as to how a building can apply for conversion and the odds associated with winning the lottery (very low odds the first few years, almost guaranteed conversion after the 6th year of entering the lottery). There are also fees associated with converting a TIC into a condominium–as of 2006, the building owners must pay $8,336 to the city for the processing (this does not include any fees associated with bringing the property up to the proper codes for conversion).

A 2 unit building can bypass the lottery and start the conversion process if both units are owner occupied for one year or more.

Some changes that we’ve seen:

Some banks are now loaning money for individual TIC units rather than financing the entire building. Though I know these loans exist, I have yet to hear about one being funded in SF. I do know that these loans cost a borrower more money than a typical loan, but the risk is significantly lower for an owner (the financial risk; the conversion hurdles remain the same).

In the past, most real estate agents would take offers on individual TIC units when the building was vacant. What we’ve seen as of the last 4-6 months is that agents will no longer sell individual units, but instead, insist on seeing an offer for the entire building. This would require a group to be formed before making an offer on the building. A group can be formed either by friends or business partners getting together, but what we’ve seen a lot of lately is real estate agents pairing up clients to see if the partnership could work.

TIC’s have become one of the primary sources for entry level housing in SF. This is due to the high costs associated with buying a home in San Francisco, city restrictions on new construction, and rent control rules that discourage investment ownership of multi-unit properties.

Though TIC’s can be a great way to enter into the market, it’s not a good fit for all home buyers. What I have written above hardly scratches the surface in regards to the risk, cost, and laws associated with buying or converting a property, but it does give brief insight into TIC’s (for those of you that are interested). Conversely, Greg and I have seen and worked with clients that have bought multi-unit buildings and are converting or have converted and have made significant returns on their investments.

More info on TIC’s: g3mh.com