SFMortgage.com Smart Financing The Insider’s Guide

In a residential TIC each owner owns a specified percentage of the entire building, not one particular unit.

  1. Make sure that you understand the pros and cons
    of TIC ownership and financing.
  2. Choose your TIC partners carefully.
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What do I need to know about TICs?

Note: A TIC, or tenancy-in-common, transaction is complicated, and it is very important to understand the implications of buying an interest in a TIC before making an offer. The information presented here is a good place to start, but it is also a good idea to speak with us or some other lender who has extensive TIC experience. Another excellent resource is the website of Andy Sirkin, an attorney in San Francisco who specializes in TICs.

The most important differences between a residential TIC and a condominium are the ownership structure and the financing. Nowadays, financing a condominium is as easy as financing a single family residence. Financing a TIC, however, is more complicated and generally more expensive. It is because of the more complicated ownership and financing issues that an interest in a TIC will be less expensive to purchase than an equivalent condominium.

What is a TIC, or tenancy in common?

In a TIC or tenants-in-common ownership arrangement, two or more people share ownership of a piece of real estate. Recently, TIC ownership has become more common. TIC arrangements are used by investors purchasing an interest in a property as part of a tax-deferred exchange, and by vacation homeowners who want to share the expense of owning a vacation property. Residential TIC arrangements are common in San Francisco, when prospective homeowners join together to purchase a multi-unit building in which to live.

In a residential TIC, each owner owns a specified percentage of the total building—not a particular unit in the building—and each owner’s individual TIC interest can be conveyed to another party, or passed on as part of the estate if the owner dies. In a typical residential TIC arrangement, a group of buyers—either individuals or couples—come together to purchase a building having two or more living units. Under terms spelled out in a separate “Tenancy in Common Agreement” each buyer has the right to occupy one of the units, although they all own the entire building together.

TIC ownership has become widespread in San Francisco over the last ten years. Because a TIC unit costs less than an equivalent condominium, TIC ownership has allowed many people to enter the home market who would otherwise be priced out

How is financing a TIC different than financing a condominium?

A condominium is a property which has been legally divided into individual parcels, each with its own parcel number, and separate property tax bill. Each owner has a deeded interest in one specific parcel— that owner’s unit—as well as a shared interest in the common spaces of the condo project. The owner’s individual condo unit can have its own separate mortgage loan, independent of any financing on any of the other condominium units. That unit, as a legally unique and deeded piece of real estate, can be sold or passed on to any other person.

In a TIC, each owner owns a percentage interest in a single property. Regardless of the number of owners, there is only one piece of property—the building itself—with one parcel number and one property tax bill. The right of any one of the owners to occupy a particular unit is not deeded, it comes from a contract, normally drafted by an attorney for the buyers, called a “Tenancy in Common Agreement”. This is the case whether the building is financed using a single group loan, or whether each owner has an individual ‘fractional loan’ secured by his or her percentage interest in the building.

What loans are available for a TIC purchase?

There are two loans available for TIC purchases, a group loan and a fractional loan.

Group loan advantages

  • lower interest rate
  • lower monthly payment
  • no prepayment penalty
  • lower down payment

Group loan disadvantages

  • expensive to refinance
  • more difficult to refinance
  • each partner responsible for entire loan
  • can make selling more difficult

Fractional loan advantages

  • individual interest can be sold more easily
  • not financially responsible for other partners
  • group does not have to get a new loan when only one partner needs one

Fractional loan disadvantages

  • higher interest rate
  • higher monthly payment
  • may have expensive prepayment penalty
  • higher down payment

Group TIC Loans

With a group loan, all of the buyers of the property apply for a loan together. Conventional lenders will only do one loan on the entire property, with all of the buyers as co-borrowers on the loan. Although the buyers will be occupying separate units, they are jointly purchasing one property. There are several important issues with a TIC group loan that you should be aware of:

  • All of the borrowers qualify for the loan as a group. From the lender standpoint, income and assets are pooled: essentially, the lender looks at the transaction as a single loan—which it is—with one borrower, the group. The dynamics of the group are very important. For example, one borrower with a high income but very little down payment can be compensated for by another group member with a low income but substantial assets. Also, the credit score of each individual is important because most lenders will use the lowest credit score in the group when pricing the loan.
  • Group TIC loans generally have more rigorous qualifications than individual condominium loans. They may require some combination of more down payment, better credit, higher income, or more disclosure of income and/or assets. This is because the lender is looking at a much larger loan size than if each unit were being sold individually like a condo. If four borrowers are buying a $2.5 million dollar building with 20% down, the lender is looking at one very large loan amount—$2 million. This is also the reason that most TIC loans require an aggregate down payment from the group of 10% to 20%, not the 5% that is usually adequate for a condo purchase. However, remember that the group dynamics might allow very little down from one member if another group member is coming in with a sizable down payment.
  • Each member of the group, as a co-borrower on the loan, is responsible for the loan payment. If the loan becomes delinquent because one borrower can’t make their payment, the credit of each member is negatively affected. That’s why it is important in a TIC to know the credit score, job and income history, and overall financial strength of your partners. Partners should be prepared to share their financial information with each other.
  • The primary disadvantage of having a group loan is the complications it presents when one or more of the TIC partners wish to sell their interest. A few lenders allow partial assumability of a TIC loan. This means that if one member of the group sells his or her interest, another party can assume that person’s interest in the loan for a fee. Always ask your lender if a loan with partial assumability is available.
  • Without partial assumability, the partners may have to get a new loan whenever a partner sells, which can be expensive. If the loan does not allow partial assumability, it may be possible for the group to keep the original loan which has the seller as borrower, while the new partner simply makes the seller’s payments. However, if the unit has appreciated, the seller’s percentage of the group loan may not provide a loan large enough for the new buyer, unless the seller is willing to carry a second mortgage for the new buyer. In that case, the seller would not be able to cash out all of his or her equity at the time of sale.

Fractional Loans

With a fractional loan each buyer of the property applies for a loan individually, although there is only one lender making each of the individual loans.

  • A fractional TIC loan allows the individual members of the group to have their own separate loans, secured by a deed of trust covering that individual’s TIC percentage interest.
  • With a fractional loan, each member of the group qualifies for an individual loan based only on their individual qualifications.
  • If a member of the group defaults, the lender forecloses only on the share of the individual who defaulted, not on the group as a whole.
  • If a member sells their interest, the buyer must then go to the same fractional lender to get their own loan. The buyer must qualify for a new fractional loan with the original lender. There are no other lending options.
  • Fractional loans generally have a substantially higher interest rate, and higher closing costs, than a group loan, and they will usually have an onerous prepayment penalty.

With a group loan, most types of loans are available—hybrid loans with an interest-only payment, fixed rate loans, and ARMs, including negative amortization loans. With fractional loans only hybrids are available; an interest-only payment may not be an option. Most fractional loans require a three to five year prepayment penalty; most group loans do not.

Fractional loans have only become available in the past couple of years. The terms, availability, and cost of fractional loans may change rapidly if their adoption becomes more common. Again, if you are seriously looking at a TIC purchase, contact an experienced TIC lender early in the process.