I’ve noticed more and more TICs are being formed for large buildings. Isn’t it more risky to buy into a large building?
The assumption that large TIC groups are more risky and problematic than small ones represents an oversimplification of a number of complex issues. From the standpoint of group relations and property management, large groups actually have significant advantages. It turns out that the groups with the most difficulty making decisions, and the highest incidence of disputes leading to mediation and arbitration, are two-unit TICs. (The same is true of two-unit condominium buildings.) As the buildings get larger, the likelihood of a disputes diminishes. The maintenance burdens, and the risks associated with unexpected repair costs, also diminish as buildings get larger because the costs, while slightly higher, are spread out over more owners, and economies of scale lower the cost-per-owner.
On the other hand, both financing and the condominium conversion process are more problematic in larger buildings. Financing is more difficult because larger TICs need TIC-friendly loans that allow resale without refinancing. Fortunately, more and more lenders are offering these loans, and individual TIC loans may be available in the near future. Condominium conversion is more difficult because buildings with more than two residential units must win a lottery, and buildings with more than six residential units cannot convert. But it is important to keep the condominium conversion issue in perspective. There is virtually no difference between a three unit building and a six unit building with regard to the odds of winning the conversion lottery. Moreover, the odds of winning are very low and getting much lower every year, so even though a 3-6 unit building might eventually win if it is able to maintain its owner-occupancy for 10-20 years, it is not statistically much more likely to convert than a twelve unit building which cannot enter the lottery at all.
How are TICs structured?
In most TICs, a "relative value percentage" is assigned to the areas (dwelling, parking, storage, deck etc.) that each owner will occupy. Factors that affect relative value percentage include size, level within the building, light, views, and general condition. The percentages are typically determined through an appraisal process conducted by either the prospective co-owners, a real estate agent, or a licensed appraiser.
After purchase, each owner occupies and maintains his/her assigned areas. The costs of maintaining shared areas, and insuring the building, are divided according to "relative value percentage". Property tax is divided according to purchase price. Each owner can sell his/her interest at any time. If the building is converted to condominiums, each owner receives his/her assigned areas as a condo.
Frequently, a prospective TIC owner will have a small down payment but ample income, or a large down payment but limited income. This problem can be overcome by making each owner’s percentage share of the loan different from his/her percentage share of ownership. Provided that the total of a particular owner’s down payment and loan share equal his/her share of the building cost, this type of arrangement can be equitable; however, when there is a particularly large disparity in debt and/or down payment, special precautions should be taken.
About the author
Sirkin & Associates 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.
Sirkin & Associates 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 email at DASirkin@earthlink.net, or by telephone at 415-738-8545.