TICs

1999 I was a first-time buyer looking for a home in San Francisco. The market was very competitive, so a friend and I decided we’d have a better chance of finding what we wanted if we purchased a two-unit tenancy in common, or TIC, together.

After an extensive search, we made an offer on the three-unit building pictured below. Since we only needed two units, our agent helped us find a third TIC partner. Our bid was successful and we all became homeowners for the first time. I moved into the top unit, my friend took the middle, and our new TIC partner had the ground-level unit.

We lived there for three years, at which point we were allowed to enter the San Francisco condominium conversion lottery. Amazingly, we won on our first try and converted the building to condominiums. We completed the conversion in 2005, at which point I sold my unit and purchased a single-family home.

That experience led me to make TIC financing a focus of my business. I am your best source for the most up-to-date information about TIC ownership and financing. I also have an established network of attorneys, title companies, accountants, and other service providers I can refer you to for specialized help with your TIC.

TIC Defined

The term “tenancy in common” or “TIC” describes a legal form of co-ownership that can be applied to all types of residential and commercial properties. Specifically, tenancy-in-common is defined as shared ownership in real property, with each owner holding a percentage of ownership rights. For example, two people might own a property, each with a 50% ownership interest. Or, four people could own a property, each with a 25% interest (or four unequal percentage interests) in the same building.

In San Francisco though, the term “TIC” carries an additional meaning. It refers to both the legal form of ownership and the property itself. A TIC unit is an apartment within a multi-unit building that is owned separately but doesn’t appear as a separate property in County records. That means the city doesn’t recognize the unit as a separate legal parcel and it doesn’t receive its own property tax bill (more on property taxes below).

TIC Agreements         

TIC agreements are integral to TIC ownership. Without them, TIC’s wouldn’t exist and TIC financing wouldn’t be possible. TIC agreements govern the relationship among co-owners by documenting things like house rules, monthly dues, and how and when repairs to the building will be made. In this way, they are similar to CCRs (Covenants, Conditions, and Restrictions) which govern condominium homeowner’s associations.

Unlike CCRs, TIC agreements also include information about each owner’s percentage interest in the building and which owner has the exclusive right to occupy which unit. Legally, tenancy-in-common ownership grants each owner a specific undivided percentage ownership in the whole building, but not ownership of a specific unit. To confirm which unit and owner lives in, the TIC agreement identifies which unit that owner has the exclusive right to occupy.

Documenting the exclusive rights of occupancy within a TIC is how TIC lenders secure their loans. The lender uses this language within the TIC agreement to confirm which unit the borrower for their loan has the right to live in. That unit serves as collateral for the loan.

Insurance for TIC’s

Multiunit buildings owned as individual TIC’s generally have an insurance policy covering the exterior of the building. These building policies cover only the “walls out” and not what’s inside the units, which is known as “walls-in” coverage. Walls-out coverage protects the building against fire and liability claims in the common areas, but doesn’t cover “fixtures” and personal property inside the units.

A fixture is anything that is attached to the interior of a unit such as kitchen cabinets, built-in bookshelves, and plumbing fixtures. Personal property is anything which is not attached to an owner’s unit. If TIC owners want coverage for what’s inside of their TIC unit, they can purchase additional “walls-in” coverage.

HOA’s and Dues within a TIC

Condominiums have homeowner associations (HOA’s) which set rules for the Association and collect dues. Condominium HOA’s are legal entities allowing them to protect the interests of their members and be held accountable for their actions. The governing document for a condominium HOA is the CCRs. As mentioned already, CCRs govern the actions of the owners within the HOA. CCRs are recorded with the County where the property is located.

TIC HOA’s are similar to condominiums but their governing document is the TIC agreement which is not recorded with the County. Instead, a Memorandum of Agreement is recorded which gives notice to the public that the TIC agreement exists.

HOA’s in a TIC collect dues from the owners to pay for building insurance, maintenance, shared utilities, and reserves for future repairs to the building among other things. In addition, the HOA may require that owners also contribute an additional amount to cover the building’s property taxes given that the bill is shared among all owners. (More on this below.)

Utilities typically covered by HOA dues are water, electricity for common areas, and garbage service. Individual unit owners pay their own gas and electric bills.

Property Taxes for TIC’s

Condominiums are separately mapped, meaning they’re on record with the County where they are located as individual parcels for tax purposes. Condominiums receive their own tax bill.

In contrast, TIC units are not recognized as separate units and only the building housing the TIC units receives a tax bill for the entire building. This means TIC owners must divide the building bill among their co-owners with each owner contributing his or her portion. Property taxes are then paid to the city all at once.

TIC building property taxes are the responsibility of all owners jointly and severally. This means if one owner doesn’t pay his or her portion, the other owners are still liable for it. To mitigate this risk, TIC’s often require that the HOA impound (collect) an additional amount each month beyond their standard dues to cover property taxes. That way, the money for their shared tax bill will already be in the HOA account when the bill is due.

TIC Accounting

Many TIC HOA’s employ a bookkeeping service to collect dues and keep track of HOA expenses. There are a few local accounting firms which specialize in TIC bookkeeping and are available to help in both San Francisco and Southern California.

The most important function of a TIC bookkeeper is to keep track of each unit’s share of the building property tax bill. As explained above, property tax bills for each unit are not issued. Each unit owner must contribute their share of the building property taxes which are then paid at one time to satisfy the entire bill.

Each unit’s share of the tax bill can be very difficult to determine. That’s because every time a unit within the building is sold the County issues a supplemental tax bill for the building. The supplemental bill covers the additional taxes owed on the increased assessed value that resulted from the sale.

Here’s an example:

• Four TIC owners purchased their building at one time with each unit selling for $500,000
• Each owner owns 25% of the building.
• The assessed value of the building for property tax purposes is $2,000,000.

A few years later, one owner sells for $750,000. That unit’s assessed value will increase to $750,000. A supplemental tax bill will be issued to cover property taxes due on the additional $250,000 in assessed value. The TIC bookkeeper will make certain only the new owner is responsible for the supplemental tax bill, and not the owners who did not sell.

Differences between Condominiums and TIC’s

Why Buy a TIC?

Simply put, TICs are less expensive than condominiums even though they’re often of the same, or better, quality. Given the choice, many buyers opt for a TIC to get the same amount of space as a condominium, but at a lower price. If condominiums were the only option, many buyers would be priced out of the city’s most desirable areas, or even the city itself.

Buyers often choose TIC’s because they are in San Francisco’s best neighborhoods, in the historic buildings the city is known for. Contrast this with newly constructed condominiums, which are generally located in the outlying areas of the city because building new condominiums in more established neighborhoods remains challenging thanks to scarce land and strict city development rules.

San Francisco-style TIC’s were created in response to rent control and limits the city places on how and when a unit in a multiunit property can be occupied by an owner. Ongoing demand for TIC’s continues to be driven by the desire for buyers to own a home in the city’s best neighborhoods and live in the historic structures San Francisco is famous for.

Rent Control in San Francisco

In 1979 San Francisco decided to impose rent control on apartments so people who work in the city could afford to live here. Since then, San Francisco has continued to strengthen its rent control ordinances.

By some estimates, 65% of San Francisco residents rent and 35% own their homes. Nationally, it’s the opposite – 35% rent and 65% own. Because most people living in San Francisco are renters, rent control and regulations discouraging the displacement of tenants have historically had very strong support.

The 1979 legislation not only introduced rent control, but also imposed limits on condominium conversions. When landlords choose to convert their rental apartments to condominiums it’s usually with the goal of selling them. For this reason, such conversions often displace tenants. To prevent this, San Francisco chose to place limits on the type and number of apartments that could be converted each year. This led to fewer condominiums for sale and higher prices.

Restrictions on Owner Occupancy

San Francisco limits the number of “owner move-in” (OMI) evictions in multiunit properties. Before OMI restrictions, it was possible to purchase a multi-unit building with friends and have all new owners occupy separate units in the building. However, since the early 1990s, San Francisco has placed limits on OMI evictions. In almost all cases, only one unit in a multi-unit building can be occupied by an owner even if more than one person, or one family, owns the building. Additionally, the city places restrictions on which unit, and which tenants, in a multiunit property can be subject to an OMI eviction.

TIC’s, a New Form of Homeownership

Most buildings seeking to convert to condominiums are small, historic buildings located in the city’s central neighborhoods. Because limits on condo conversion led to fewer of these types of buildings converting, the supply of new condominiums fell and prices rose.

Because restrictions on OMI evictions led to fewer units in multiunit properties being sold to owner occupiers, buyers chose to purchase condominiums instead.

The market reacted to the increased demand and higher prices for condominiums by creating a new, more affordable form of ownership that isn’t regulated by the city: tenancy-in-common or TIC units.

TIC’s have been a homeownership option in San Francisco for over 30 years. As they became more popular, the San Francisco multiple listing service created a separate property category for them in 1993. Before that, TIC’s were included with condominiums even though the two types of ownership are markedly different.

The concept of TIC ownership originated in San Francisco but has since spread to other areas in California where similar rent control and condominium conversion restrictions are in effect.

Condominium Conversion in San Francisco

Currently, two-unit buildings in San Francisco which have had owner-occupiers in both units for at least one year, can convert to condominiums by following the city’s conversion process. To be eligible, the city requires that each unit owner owns at least 25% of the building.

Additionally, the city has strict rules concerning conversion based upon a building’s history of tenant displacement (either through eviction or other means). If an eviction or tenant buyout has taken place, the building may not be eligible. The regulations are complicated so it’s important to consult with an attorney to determine if your building is eligible.

Condominium Conversion Lottery

Before 2013, two-unit buildings that weren’t 100% owner-occupied, and 3-6 unit buildings that met certain owner occupancy minimums, could convert as well. To do so, they had to first enter a lottery held by the city each year. If they won, they would follow the same process two-unit buildings use to convert.

Each year a maximum of 200 TIC units won the right to convert to condominiums. Since hundreds of buildings with thousands of total units applied each year, the odds of winning were slim. This allowed the lottery to achieve its goal of significantly limiting the formation of new condominiums and preserving rental stock.

The End of the Lottery and Expedited Conversion

In 2013 new legislation suspended the condominium conversion lottery for at least a decade. During the ten-year moratorium, the backlog of buildings that failed to win the lottery were allowed to convert to condominiums on an expedited basis, so long as they meet specific requirements and the owners paid an additional fee.

The 2013 moratorium has now passed. As of this writing, very little information has been provided concerning when the lottery will resume and what the new rules will be. What’s known at this point is that two-to-four unit buildings should once again be eligible for conversion, but not 5+ unit TIC’s.