Key Differences Between TICs and Condominiums
By Andy Sirkin (3/28/14)
The most important difference between condos and TICs is the availability and quality of financing.
Because the total dollar volume of TIC loans remains relatively small, there is still no secondary market for them. This means lenders must hold these loans in their portfolio, a fact that has kept many banks on the sidelines. Other banks have concluded that the relatively small market for TIC loans does not justify the costs of developing a program. The bottom line is that even though TIC loans have a lower rate of default and a higher yield than condo loans, there are currently only four lenders offering them.
Lack of competition in the TIC lending market has kept pricing high, underwriting guidelines strict, and the range of available products small. Compared with condo buyers, TIC buyers pay .75-1% higher interest, need at least 5% more down payment, and cannot get a 30-year fixed interest rate. Marginally qualified TIC borrowers often cannot get a loan at all. Moreover, the relatively small number of lenders, and these lenders’ relatively small size, create uncertainty as to the future availability of TIC loans. This means that TIC buyers, unlike condo buyers, face the prospect, albeit unlikely, that they will not be able to sell of refinance.
Another important difference between condos and TICs is the property tax assessment and billing system. Condos get their own tax assessment and bill, while TICs assessed and billed as apartment buildings. This means that TICs must maintain internal records of purchase prices, make their own tax allocation, and collect tax as part of their HOA dues system. All of this creates complexity and risk, particularly for TIC groups that ignore there TIC agreement and collect tax on an as-needed or informal basis.
A third important difference between condos and TICs is that condominium agreements are recorded while TIC agreements are not. TIC agreements are unrecorded because, under state and local law, recording them creates illegal subdivisions. Unrecorded documents need to be signed to ensure legal validity, and failure to sign the agreement remains a significant and stubborn problem in the TIC world. Unrecorded agreement are also more time-consuming and expensive to enforce. Fortunately, recent advances in TIC agreement drafting have lead to potential solutions to both of these problems, and these solutions have been approved by the Bureau of Real Estate and are currently being tested in several buildings.
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.