Feature

TICs: The Wave of the Future?

by Arthur Griffith

With the rise in popularity of tenancy-in-common arrangements (TICs), a
number of my clients are considering selling their apartment buildings in this form. In order to understand the opportunity that TICs present, there is a need to identify first what TICs are. Tenancy-in-common is a property ownership arrangement in which two or more persons own property jointly. Ownership may consist of equal or unequal percentages of the property. The most common example is an apartment building that is owned collectively by partners instead of individually by just one owner.

Common Traits of TICs Are:

all tenants-in-common are named on the title deed and each owns a
percentage interest in the property as a whole;
each tenant owns an undivided interest in the property;
the building is secured by only one mortgage; and
a carefully drafted written agreement dictates the rules and regulations for the building and its use, and that usually contains a provision specifying private spaces.

TIC ownership has been around for many years. Its current popularity is due to a combination of factors. The city of San Francisco severely restricts both new condominium construction and conversion of existing buildings to condos. This stranglehold forces condo values to remain high, while the cost per unit value of apartment buildings is comparatively low. The byproduct is affordability for TIC groups who buy and then occupy apartment buildings. This low-cost basis, combined with the potential risks associated with sharing ownership and financing responsibilities, typically translates into a 20 percent reduction in market value for TICs as compared to condos.

Many first-time buyers seize the opportunity as a chance for home ownership. Historically low interest rates have also helped push into the market many of these buyers, who would otherwise not be able to afford property. An added bonus to TICs is the potential for 2-6-unit buildings to be converted to condos at a later date. The net result is an increased demand that far outstrips the available supply, and thus more creative means are necessary.

In response to this demand, many smaller apartment buildings (2-6 units)—formerly sold to one buyer—are being marketed as individual TICs. Larger buildings of 7-plus units are rarely purchased as TICs. This is primarily because there is no chance of condo conversion due to the San Francisco’s Condo Conversion Ordinance; and TIC buyers generally perceive that fewer co-owners lessen the chances of conflict between them. In theory, selling each unit individually can result in a higher total sale and, for the right building, this still holds true. Before you go out and start selling off TICs, read on. There are, as always, a few caveats.

TIC buyers are essentially house hunting. Most, if not all, intend to use the property as a primary residence. This means the units must be both structurally sound and aesthetically pleasing. Paint color, floor type and amenities like granite counters, contribute to a home that feels nice and will command premium values. Most apartment buildings simply do not measure up. In fact, a large percentage of TICs currently on the market, received substantial renovation before their sale. If your units are in particularly good shape or have been recently renovated, TICs may be a good option. If so, be sure to consider the
following issues:1031 exchanges, liability and market value.

1031 Exchanges
If you intend to trade your property instead of paying capital gains taxes, you must remember that as soon as the first escrow closes—not when the last closes—your 45 days to identify a replacement property begins.

Liability
Some real estate companies and brokers refuse to sell TICs, for they feel the threat of a lawsuit from disgruntled parties is too high. Consult with an attorney who specializes in TIC agreements. Do not use boilerplate templates or contracts, for each case is unique.

Market Value
In today’s market with demand for apartment investments at an all time high, selling your building to one buyer through traditional means can be close to, if not equally, as profitable as a TIC. Be certain to complete your due diligence.

If you own a larger building (7-plus units) or intend to hold your property for the foreseeable future, TICs still impact your investment. The good news is that as more TICs are sold, it decreases the supply of apartment investments available for purchase. Following the basic law of supply and demand, a reduced supply is bound to increase demand and thus prices. In conclusion, TICs are great for apartment values. As always, for a more detailed assessment of your property and tips to maximize value, contact a knowledgeable broker.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Arthur Griffith is an apartment broker and a
state-licensed appraiser with BT Commercial. He can be reached at 415-677-0451. Copyright © 2004 by the San Francisco Apartment Magazine. All Rights Reserved.