TIC Corner
Generation TIC
by D. Andrew Sirkin
This year is my twenty-fifth writing TIC agreements, as well as my twenty-fifth year as a TIC owner. It’s hard to say whether I’ve learned more over the years from the feedback of my clients and their realtors, or from my own experience with the eight TICs in which I have personally participated, but I can say for certain that every day brings new insight and ideas on how to operate a TIC and improve TIC contracts. The gradual evolution of our TIC agreements continues each week, as we make small alterations to adapt to the latest round of unforeseen events and new questions. But, every now and then, we rework the basic TIC agreement templates from scratch, and make the kind of fundamental structural and organizational changes that cannot be handled incrementally. We have gone through this process over the past eight months, and are now proud to announce the “new generation” of TIC agreements. In this article, I will describe a few of the most significant changes and the issues we had in mind when making them.
Rules Are Rules
It turns out that roughly 95% of TIC groups get along fine and never need to use their TIC agreement. The other 5%, the “problem groups,” rely heavily on their contracts. A common characteristic of these problem groups is a problem member who is not particularly considerate and regularly stretches or bends the rules. The victims of this behavior frequently complain about the burden of enforcing the rules against the bad actor; they wonder why they should have to incur the cost of hiring an attorney and initiating an expensive dispute resolution process, while the inconsiderate and disrespectful owner sits back and waits for consequences, then starts the process all over again with some new offense. For better or worse, no legal contract enforces itself. An impartial judge or arbitrator must be available to resolve disputes and, where necessary, bring in the power of the state to compel compliant behavior. But we felt that several changes to TIC agreements could shift the burden of enforcement to the person creating the problems.
The first of this group of changes was to significantly tighten the rules relating to the most common problem areas: parking, storage, and alterations of common and exterior areas. For example, regarding assigned parking and storage spaces, we now require exact and permanently mapped boundaries for each space, and that every part of an owner’s vehicle or stored items be entirely within the borders of the owner’s space. More important, we empowered the other owners to take immediate action, such as having an improperly parked car towed, or disposing of items improperly stored in shared areas such as yards and hallways, without initiating a mediation or arbitration process, provided the owners can document the violation with photos or other evidence. In effect, the burden of going to the trouble and spending the money to initiate a dispute resolution process has been shifted from the complying owner to the noncomplying one.
Some of our clients have concerns about creating strict rules and enabling direct “self-help” enforcement. In the warm glow and excitement of the buying process, they feel that creating these rules and procedures can send the message that the parties themselves are strict and unreasonable, rather than willing to “just try to get along” and “work things out.” But, in practice, it turns out that the best way to get along is to create strict rules and to enforce them consistently. The groups we see for dispute resolution tend to be the ones who either didn’t create a clear rule about the issue in dispute, or went through a period of not enforcing the rule and now need to change course. For example, we have had several instances where an owner with a small car allowed another owner with a larger car to use more than his allotted parking area. Later, when the first owner purchases a larger car, or wishes to sell, the second owner refuses to stop using the extra space, particularly when his larger car cannot fit within his allotted space and must be parked on the street. A similar example is where an owner who has long stored personal items in a common area refuses to move them to prepare the building to be shown for a sale.
Budgeting, Assessments and Expenditures
In general, TIC operating expenses fall into two groups: mandatory items, such as mortgage payments, property taxes, insurance premiums, necessary maintenance and utilities; and nonmandatory items, which include everything else. Another common characteristic of problem TIC groups is that one owner resists approving a new or adjusted budget, and the resulting assessment or expenditure, even though all of the expenses are mandatory items. Sometimes an owner will take this tack simply to delay making a payment, but more often the motive is to force the group or another owner to make a concession or compromise on an unrelated issue. Since the TIC group really has no choice but to pay for mandatory items, and to adjust their budget and owner collections to match increases in these items, there is no reason to submit these issues to a group vote, and thereby create an opportunity for a difficult owner to start a dispute that requires the others to incur the time and expense of dispute resolution.
In recognition of this fact, we have made changes to the to new-generation TIC agreements designed to streamline the budget, assessment and bill-pay process. For example, we have enabled the manager to adjust the budget himself, without calling a group meeting or vote, provided the adjustment is based on a mandatory item, and the manager can document the cost. An owner who disagrees with the budget can challenge it, either by calling a meeting, or by initiating dispute resolution, but only after paying the resulting assessment. No one can refuse to pay based on his intention to challenge the budget or assessment. If the owner’s challenge is successful, he will get a refund. Similarly, when an owner is personally assessed for damage he has caused to another unit or the common area, or for costs resulting from a violation (such as towing or debris removal), he must pay the assessment first and then seek a refund by challenging its validity through the dispute resolution process.
Insurance and Responsibility for Damage
Property damage in condominiums and TIC buildings has always raised complex issues, particularly when an occurrence in one apartment (such as a leaking pipe) causes damage to another, or when a common area failure (such as a leaking roof) causes damage inside one or more units. Recent developments in the insurance world, such as rising premiums and the tendency of insurers to hike rates based on the number of claims submitted, have only increased this complexity. Our new-generation TIC agreements provide significantly more detail and guidance regarding damage responsibility and insurance. For example, these agreements more clearly articulate when one owner is responsible for damage in another owner’s unit, and when the group is responsible for damage to apartment interiors, as well as how this responsibility is affected when an unusually high-value item, such as artwork or expensive electronics, is damaged. Similarly, these agreements define which items and building elements the group insures, and which items and elements individual owners insure, and limit each individual owner’s right to make claims against the group or another owner when the first owner incurs a loss because he didn’t carry enough insurance.
Another important insurance issue addressed in the new-generation TIC agreements is the decision-making process for making claims against the group policy. Often, owners are torn between the desire to collect insurance proceeds for a covered loss, and the reluctance to risk increasing premiums and triggering policy cancellation. The new-generation agreements specify when a claim will be submitted, and how losses will be allocated when no claim is made. It also describes how insurance deductibles are shared, an issue that can be particularly troublesome when damage spans multiple units and common areas, and both individual and group policies provide coverage.
Default
While the incidence of default in TIC groups is extremely low, the potential consequences are serious, particularly in today’s world of falling property values and difficult sales and refinancing. Yet default procedure in TIC agreements has remained essentially unchanged in the past 20 years. Our new-generation TIC agreements take an entirely new approach, designed to make the process of forcing out a defaulting owner easier, faster and less expensive. Central to this new approach is the elimination of the need for a mediation or arbitration step when the default involves a nonpayment of assessments. In a similar vein, all but one of the steps in our new post-default forced sale procedure can be handled internally, with no need to compel the defaulting owner to sign documents or otherwise cooperate in the sale process. This change eliminates the need for a court or arbitrator to be involved continuously or repeatedly in the forced sale process.
Condominium Conversion
While TIC owners are generally anxious to convert their properties to condominiums as soon as they qualify, there have been increasing incidents where one owner tries to delay the conversion for financial reasons. While this type of delay violates the provisions of most TIC agreements, the owners trying to move the conversion process forward have complained about the difficulty of enforcing these provisions. Our new-generation TIC agreements authorize any one owner to move the conversion process forward even when another owner or owners try to delay it, and provide the tools for a single owner to take all the necessary steps, without hiring an attorney or initiating mediation or arbitration. In recognition of the fact that a default/forced sale procedure may negatively impact the building’s qualification for conversion, these tools include the ability to levy assessments for conversion costs, and securely lend money for these costs, then initiate a forced sale immediately following conversion.
This summary contains only a handful of the many changes throughout the new-generation TIC agreement, all designed to make the agreement easier to read and understand, and faster and less expensive to enforce. The changes reflect the accumulated experience from creating many thousands of TIC agreements, listening to many more thousands of individual stories from TIC owners and their realtors, and conducting hundreds of mediations. But while we have taken a significant step forward in improving TIC contracts, we recognize that the coming weeks and years will reveal the need for further refinements, and the evolution of the TIC agreement will continue.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the 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 © 2010 by Black Point Press. All rights reserved.