The TIC World
TICs a Bright Spot in the Floundering Market
By D. Andrew Sirkin
Q. How has the residential TIC market performed during the recent real-estate slump?
A. Although tenancies in common are not as well known or as well established as other homeownership options, they have proven remarkably resilient during the recent down cycle in home prices and sales volume.
“TICs are the only growth category,” says Bonnie Spindler, a top agent at Zephyr Real Estate in San Francisco. “People are less willing to stretch and want to buy less. A tenancy in common is a less expensive way for them to fulfill their needs in terms of amenities and location.”
This optimistic view of the TIC market was echoed by Anthony Kutsos, an agent with Brown & Company, also in San Francisco. “TICs are doing pretty well,” says Kutsos. “There are still a lot of buyers out there and they are more open than ever about buying as tenants in common. They seem to be more willing to move on TICs than on other product types.”
Still, current market conditions are demanding, and having the right unit at the right price is just as important in the TIC sector as in other market sectors. “Buyers are really kicking tires, and this means it takes longer to ratify contracts and longer to close,” notes Tim Brown, a broker at Brown & Company. “Units that are on a busy street, lack parking or badly remodeled are very difficult to sell in this market, and must be priced aggressively. Studio units can be difficult to sell, as can units in peripheral areas. Still, TICs are moving faster in general than other offerings.”
“I’m seeing a lot of strength at the top and the bottom of the market in terms of price, with more weakness in the mid-price range,” adds Spindler. In addition to their lower pricing, TICs are benefiting from a generally favorable lending environment. “There have been fewer financing issues with TICs and rates have remained attractive,” notes Spindler.
“The loans are definitely important,” says Kutsos. “Buyers are insisting on fractional financing now. Before, more buyers were willing to accept group loans.”
Pat McCarty, senior vice president with Circle Bank, one of the market leaders in individual TIC financing, confirmed that Circle remains committed to offering TIC loans, and that the volume of loan originations has not dropped over the past 12 months. “These have always been portfolio products, which means that they are somewhat more insulated from market pressures,” says McCarty. “We also use a lower loan-to-value ratio, meaning there is less exposure to market adjustments. And we have not had any delinquencies, defaults or foreclosures on TIC loans.”
But, anecdotal evidence suggests that underwriting procedures on TIC loans have toughened. “Sometimes the first appraiser will bring in a second appraiser,” says Spindler. “Everything is taking much longer to close.”
Q. Is it possible to do a unit-assignment TIC on commercial property?
A. Commercial TICs with unit assignments are not only possible, they are actually becoming more common. The fastest growing sector of the commercial TIC market seems to be medical office buildings. The doctors that occupy these buildings are delighted to have an opportunity to purchase them, and to use their monthly payment to build equity rather than simply paying their rent. These professionals rarely relocate, making ownership an excellent option. In addition, these TICs are popular for general-use office buildings, storage facilities and industrial properties.
In all these cases, owners are opting for unit-assignment TIC formation, rather than for condominium subdivision, because local law makes subdivision impossible, overly costly and/or very time consuming. Selling TIC interests does not require any local governmental approval. Also, all-commercial buildings are exempt from state approval requirements regardless of their size. Note that this exemption does not apply to mixed-use buildings with both residential and commercial units.
Commercial unit-assignment TICs have much in common with their residential cousins. Under the TIC agreement, each tenant-in-common owner has the exclusive right to occupy a specific unit or suite. The owners maintain their own spaces and have the right to alter and improve them. They pay dues to an owners association for common area maintenance and management.
The primary weakness to TIC marketing of commercial property is the lack of readily available individual financing. Although several lenders have originated fractional financing for all-commercial TICs, the number of projects financed in this way has been limited. If individual financing is not available, the TIC purchases are financed with all-inclusive (wraparound) individual loans, seller financing or group loans. All of these options have disadvantages compared with institutional fractional financing, and a prospective seller must weight these disadvantages against the expected pricing premium from a TIC sale.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. More detailed information on this topic is available online at www.andysirkin.com. D. Andrew Sirkin’s law practice is devoted exclusively to tenancy-in-common, equity sharing, investment partnerships and other co-ownership matters. Copyright © 2008 SF Apartment Magazine. All rights reserved.