A lot of readers come to my blog looking for information about TICs (Tenancy-in-Commons). One reader asks:
Q: I am a Mortgage Broker from Los Angeles and [I have] a client who asked me about purchasing an individual unit in a building that is being converted into a TIC property... having never heard of a residential TIC property, I did my research today and found your name on an article about Sterling Bank & Trust and their entrée into the individual lending on TIC properties. The property in question is in Santa Monica, CA where Coop’s and condo conversions are the norm and where apparently there are only 2 of these TIC properties either being built or in the process of conversion too – My question can you forward me any additional info on TIC’s and do you have a contact at Sterling that I might call and get loan info from?
A: Thanks for your inquiry. First off, there are 2 ways to purchase a TIC. One is in the traditional TIC way, is in which all buyers purchase a percentage interest in the property that adds up to the total of the purchase price TOGETHER. This is the most common way. So, if there are 4 units, each buyer is purchasing a percentage of the whole building, and each is doled out a “unit” which represents his or her percentage, all on one loan together. This is risky, as if one person defaults on his or her portion, all of the others have still have to pay the entire come up with the entire mortgage. The second risk in TIC ownership is that local and state changes in legislation can be put into place which directly affect ownership rights (in San Francisco, for example, TICs groups can enter into a city lottery to convert to condominiums, but the city can change the rules and upset the balance at any time). Also, no one owns a unit separately – so they don’t have the same rights as condominium owners do (which is why the impact of legislative changes makes this a rather volatile sector of real estate).
Individual TIC financing, (known as fractional TIC financing) is a relatively new financing tool that was born from the above noted risks in attempt to minimize the volatility of owning property as a TIC. A few banks, such as Sterling, have come up with a way to allow TIC purchasers to each have SEPARATE loans for each unit, which act much like loans for condominiums. Since the risk is higher for the bank, because it cannot leverage the entire building in case of a default, these loans tend to be at a higher interest rate, need better credit scores to obtain, and ultimately require a high down payment (20-25%), which historically has created a barrier for some people in purchasing units in this fashion. Additionally, fractional TICs must be in place for every unit in the building; your buyer cannot just decide that she, outside of everyone else, will have her own, individual financing, while everyone else is on a loan for the remainder of the building.
I just last week received a notice from Sterling Bank & Trust that announced they can now offer fractional TIC financing which would only require 10% down, which may make fractional financing a more viable route to affordable housing. The phone number listed on the announcement is (415)970-9889. If you would like to learn more information about TICs, Attorney Andy Sirkin has a great website that addresses the most frequently asked questions. Good luck!
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Amy Blakeley, REALTOR®
McGuire Real Estate
ablakeley at mcguire.com