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By Jesse E. Fowler, Tim Brown and Ryan Brown

The facts are hard to ignore: the scope of San Francisco’s housing stock has changed dramatically in recent years. Tenancy-in-common (TIC) sales volume in San Francisco is projected to exceed $500,000,000 in 2007. By comparison, TIC sales volume in 2001 was less than $50,000,000. That’s right...in just six years, the TIC market has increased in volume by an astonishing 1,000%! TIC sales now account for 24% of today’s condo/co-op/loft/TIC home ownership sales.

This article will explore the evolution of how history, trends and neighborhoods have contributed to this new and ever-expanding market for an innovative property type.

In San Francisco, there has always been a need for affordable ownership housing, an increase in available units and for more practical TIC financing. There is also a desire on the part of property owners and developers to make use of their existing properties to bring higher returns.

TIC History
The TIC homeownership market started to take hold in the early 1980s. At that time, increases in real-estate prices and interest rates made it difficult for home buyers to find housing that was affordable and, at the same time, spacious enough to meet their needs. American resourcefulness and creativity prevailed, and friends or families would purchase older Edwardian and Victorian buildings that had previously been utilized as rental housing. The typical TIC at the time was a 2-4-unit building where the co-tenants would each own a percentage interest in the building as a whole and, either verbally or in writing, create covenants whereby each owner would have the right to occupy one or, in some cases, multiple units. They would obtain a conventional loan on the building and each owner would be responsible for making their portion of the group mortgage. The co-owners would be jointly and severally liable for nonpayment of their or their co-tenants’ payments.

Today, these TIC arrangements still exist. Some have no written agreements in place at all, others have longhand written documents, while others have updated their contracts and engaged a qualified TIC attorney to draft a newer TIC agreement and recorded a memorandum that such an agreement exists. Some have been forced into good judgment, drafting new agreements as co-tenants sold their percentage interest.

In late 2003 and early 2004, the TIC market started to gain momentum. As San Francisco housing prices continued to appreciate, buyers more frequently began to consider TICs as a viable option and a more affordable alternative to a comparable condominium unit (normally selling for 10%-15% more than a TIC).

As lenders and prospective buyers saw TIC demand continue to increase, Bank of Marin created fractional loan programs, which for the first time allowed buyers of TIC interests to purchase their units with individual (fractional) financing. Each buyer has a separate loan, title insurance and deed of trust, and no cross liability. A traditional group loan, on the other hand, requires all of the co-tenants, even those who may have paid all cash for their interests, to sign on the same note and deed of trust. The new fractional financing created a market for larger TIC buildings that we hadn’t seen before.

The ability to avoid the objectionable group financing lets buyers feel confident that they will be able to resell their units in the future. There are no group members who carry first right of refusal. Co-tenants do not need group approval to sell or buy. And certainly, being responsible for one’s own mortgage is paramount to a feeling of security and control.

Smaller buildings were generally preferred for TIC conversion because those with seven units or more cannot enter the city’s Condominium Conversion Lottery. Buyers of TIC interests were able to overcome their reluctance to enter into group loans because they counted on being able, someday, to convert their unit/interest into a condominium, thereby achieving their own parcel number (or APN) and having the ability to secure their own loan on the unit.

Fractional financing, however, solves both concerns. Large buildings can now be considered for TIC conversion because it is no longer necessary to build a cooperative group of stable buyers to share a single mortgage. Likewise, potential buyers of smaller units no longer have to be wary of units that may not be eligible for condo conversion (due to a previous eviction, for example) because they can achieve individual ownership and control without the bother of condo conversion.

Currently, at least nine lenders offer a fractional loan program and several others are contemplating entering the market.

Hot Neighborhoods for TICs
From their inception, the typical TICs were located near San Francisco’s geographical center. Noe Valley, Duboce Triangle, the Haight, the Mission District, Valencia Corridor, Mission Dolores, and North of Panhandle areas were most popular for TIC ownership. As the TIC market has evolved, it has also expanded to northside neighborhoods such as Pacific Heights, Nob Hill, Russian Hill and North Beach. In fact, TIC sales in District 7 (the Marina, Pacific Heights, Cow Hollow) and District 8 (Russian Hill, Nob Hill, North Beach) have risen by 63.9% and 63.3% respectively year over year.

We continue to see an increase in the volume of calls coming from different areas of the city. Owners who desire to maximize the value of their investment property see TIC conversion or development as a practical opportunity.

With some exceptions, though, buildings in certain locations do not make ideal candidates for TIC conversion. These include such areas as the Excelsior, the Sunset and Richmond districts, Visitation Valley, and Bayview/Hunters Point, though the Sunset and Richmond are slowly becoming more desirable. Other neighborhoods, such as District 4 (Miraloma Park, Sunnyside, Westwood Park/Highlands, St. Francis Wood, Forest Hill, etc.), lack the stock of multiunit buildings that are required to convert to a TIC.

With the prospect of higher rates of return on their investments, more property owners are now willing to convert their property to a TIC prior to sale. With so many more TICs popping up in progressively larger buildings, the value of almost all income property has increased.

For example, TIC units in District 7 (Marina, Pacific Heights, Cow Hollow) and District 8 (Russian Hill, Nob Hill, North Beach) have risen by 254% and 141% respectively from 2005-2007.

The market continues to open up. Based on data from the California Department of Real Estate for 5-plus-unit TIC properties (2-4-unit buildings are exempted from a formal DRE public report to subdivide into TICs), we expect an additional 6%-8% increase in TIC sales volume across the board.

Is This a Good Time to Convert Your Building into a TIC?
Only a qualified agent with experience in TIC sales can help you answer this question. But there is a basic checklist to determine if your building fits the bill.

Location: Is it in a neighborhood that is popular for TIC ownership? Does the building have easy access to transit, shopping or nightlife?

Unit Size and Condition: Although we sell almost every size and type of unit, some sell faster then others. Most buyers like typical layouts and if possible (but not always) multiple bedrooms.

Special Features and Amenities: Buyers enjoy common or exclusive outdoor space, roof decks, parking and laundry facilities (if not in the unit itself, at the very least in the building). Are there any unique or special features that make you building more desirable to potential buyers?

Condition of Building: Assess the condition of the building. Are the units remodeled? To succeed as a quality TIC, the condition and presentation of your property should exceed the quality of competing condominium units. Usually this means renovating the units prior to sale, increasing their appeal to buyers.

Ratio of Residential to Commercial: Some multiunit buildings contain commercial and residential units. Although it is possible to sell commercial TICs to the owners of the businesses that occupy them, or to other parties, it is not always easy. Generally, these buildings lack parking because commercial space occupies potential garage area. Some lenders doing fractional loans won’t accept buildings with commercial space taking up more than 25% of the floor space. Also, the type of business located in the building needs to be a quiet one (not a bar or night club, for example) as buyers generally will object to occupying buildings of this type.

Looking Ahead
Today, with the expansion of fractional financing, the TIC market has expanded to larger buildings, new neighborhoods and different buyer profiles. The buyer profile has also evolved from those looking for larger flats in minimal unit buildings to buyers of every type. First-time homebuyers with smaller down payments look to purchase one-bedroom or studio units. Pied-a-terre buyers with large down payments now look to TICs to fill their vacation or part-time habitation needs. Buyers looking for larger flats (similar to the previous TIC buyer) now have moved to the higher end northside (Districts 7 and 8) rather than buying solely in the city center (District 5).

TIC developers, reacting to the increased buyer pool, have increased the quality and type of building being converted to TICs. We have moved from the traditional 2-4-unit building with a group loan to 5-plus-unit buildings with fractional financing. Now buildings containing 2, 4, 7, 14 and even 17 units have become viable options for TIC conversion. TIC developers and owners have expanded into new locations, and are doing higher-end renovations of trophy buildings. Due to this fact, we have also noticed a staggering increase in TICs in the $1 million to $2 million range. As the TIC market has grown, it has also evolved to include districts throughout the city, buyers of every profile, and buildings of varying size and type.

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The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Jesse E. Fowler, a San Francisco native, specializes in marketing TIC developments, single-family homes and multiunit properties. Fowler, Tim Brown and Ryan Brown are with Brown and Co. Real Estate and can be reached at 415-648-5800. Copyright © 2007 by SF Apartment Magazine. All rights reserved.