In a residential TIC each owner owns a specified percentage of the entire building, not one particular unit.
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.
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
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.
There are two loans available for TIC purchases, a group loan and a fractional loan.
Group loan advantages
Group loan disadvantages
Fractional loan advantages
Fractional loan disadvantages
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:
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.
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.