TIC Talk 2, More on Tenancies in Common

This post will deal with legal restrictions (if any) that apply to tenancy in common formation, the TIC agreement, and financing a TIC, with an emphasis on how fractional financing loans work. As in the last post, with the kind permission of attorney D. Andrew Sirkin, I will be quoting from his article “Questions and Answers on Tenancy in Common” (11/01/06).

“In California, appellate courts have recognized a distinction betwen recorded and unrecorded documents assigning usage rights, and this distinction means that local laws restricting or prohibiting the conversion of apartment buildings into legal subdivisions such as condominiums do not apply to the creation of a tenancy in common arrangement so long as no document deeding or otherwise assigning usage is recorded in public records. Consequently, tenancy in common formation does not require any filing or approval with local governmental agencies (such as counties, cities, and towns).”1

However, if the property to be co-owned and occupied by the group contains five or more residential units, Department of Real Estate (DRE) approval is required. This approval process takes about 6-9 months, resulting in the issuance of a “White Paper”, or DRE Public Report, which contains extensive information and disclosures about the tenency in common group and the property. This report must be given to all prospective buyers. Generally, tenents can re-sell their interests without a Public Report, but the rules defining a true resale are strict in order to avoid shams designed to circumvent approval requirements.

Recent attempts by San Francisco lawmakers to restrict or discourage tenancy in common formations indirectly, thus keeping owners of apartment buildings in the rental  housing business, have proven innefective or been rejected by the courts. The most recent attempt in 2001 tried to make exclusive occupancy agreements, even unwritten or implied ones, illegal and unenforceable. The result would have been to make tenancy in common ownership more risky and discourage their formations. The California Court of Appeal, in 2004, held that this law was a violation of the constitutional right of privacy, and that strict constitutional limitations apply to the ability of the government to interfere with co-owners’ internal arrangements regarding the usage of their shared property.

“The upshot is that, under current California law, a TIC of the space-assignment type discussed in this article could be formed for any building (residential, commercial, or mixed use) in any location in the state. Neither the location of the building, or its zoning, size, layout, age, unit mix or construction, matter from a regulatory standpoint.”2

The TIC agreement should be drawn up by a qualified attorney, with experience in tenancies in common. The agreement should, rather than being brief, be as detailed as possible, in an attempt to address any and every possible future real-life situation that might arise. Remember, in the event that friendly relations among the co-owners break down and it is necessary to refer to the agreement in an attempt to resolve a difficulty or issue, you will want specific solutions, not ambiguity.

The agreement should include, but not be limited to:

• How the property should be divided
• Co-tenents’ general and specific financial obligations
• Formulas for determining and periodically adjusting each owners’ monthly payment
• Management of the property
• Rules governing usage of the property (pets, noise, etc)
• Defining the decision making process
• Defining and remedying default
• Policies covering death or bankruptcy
• Sales of interests and approval of potential buyers
• Resolving disputes.

In addition to the more common group loans used to finance TICs, a concept called fractional financing has been introduced recently. This provides separate loans for each fractional owner. “Each loan involves a note signed only by the owner of a particular tenancy in common interest, secured by a deed of trust covering only that owner’s TIC share. If a particular owner defaults on his/her loan, the lender can forclose only on that owner’s share. The foreclosed share is then sold, and the buyer acquires the defaulting owner’s interest. Unlike with group financing, none of the other tenancy in common owners are affected by the default or foreclosure.”3

Individual TIC financing is different than individual condominium financing in that a condominium loan is secured by title to a particular unit, while a TIC loan relies on a contract, the unrecorded TIC agreement. This makes financing this type of loan more risky for the lender, just as it makes TIC ownership more risky for the owner than condo ownership. The fact that several San Francisco banks, (which have a successful 20 year record of this type of lending), have recently announced that they are offering fractional financing indicates that they now are assured that tenancy in common projects do not present significantly greater risks than other types of home lending. It also indicates that the banks are aware of the enormous potential for loans in this rapidly growing market.

The tenancy in common concept presents a viable way to address the problems of soaring housing costs in West Hollywood and other areas as well. As with any new idea, the concept requires an open mind and the willingness to try out new, non-traditional styles of living. I welcome any comments, questions, or suggestions.

1. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)
2. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)
3. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)

TIC Talk – Time for Tenancies in Common?

One of the goals of this blog is to attempt to find ways for entry level, first time buyers to purchase homes in West Hollywood, and thus limit or even reverse urban flight to less expensive areas. The biggest problem is the market itself, in which prices have increased dramatically over wages in the past several years, to the point where it is almost impossible to find an entry-level condo in West Hollywood for less than $400,000, which means that most single income buyers making less than $110,000/year cannot qualify.

This brings us to a possible alternative that came to my attention lately, TICs or Tenancies in Common. I did not know enough about them, so last month I attended a seminar hosted by Old Republic Title Co. on TICs. One of the keynote speakers, D. Andrew Sirkin, a San Francisco attorney who has represented thousands of TICs in the past two decades, did a stellar job with his presentation. I was so impressed that I contacted him and asked him if I could quote, and/or re-print portions of the article that he based his presentation on, “Questions and Answers on Tenancy in Common” which he wrote on November 1, 2006. He was kind enough to grant me permission, so here goes:

TICs are a fairly new concept in the L.A. housing market, but one that has been, and is being used, in the East coast as well as the San Francisco housing market. “As the price of real estate continues to rise, and communities adopt ever stricter growth and condominium conversion restrictions, more and more people are turning to tenancies in common and other non-traditional co-ownership structures as a way to maximize their buying and selling power. These arrangements lower prices and increase choice for buyers by allowing them to pool resources and buy more real estate than they otherwise could or would, while agreeing among themselves on an allocation of rights and responsibilities so each buyer does not end up with more than he/she needs. At the same time, tenancy in common arrangements increase sale prices and marketing options for sellers by allowing them to sell fractions of their properties to buyers for prices that generally add up to more than what the seller would receive from a single buyer. The popularity of tenancy in commons has been further enhanced by the recent introductions of ‘fractional loans’ which allows co-owners to have individual mortgages, substantially decreasing the risk of co-ownership.”1

In addition, the tenancy in common approach to building ownership, also referred to using the terms “fractional ownership” and “cotenancy”, in which two or more people co-own a parcel of real estate without a “right of survivorship”, allows each co-owner to choose who will inherit his/her ownership interest upon death. This differs from the type of co-ownership called “joint tenancy”, which requires that each co-owner’s interest pass to the other co-owners upon death.

“The TIC has become a popular style of ownership in many different real estate contexts. For example, income property investors and real estate syndicators are increasingly using tenancy in common as a vehicle to facilitate income tax-deferred exchanges, a trend that has been propelled by recent IRS rulings recognizing certain tenancy in common structures as legitimate vehicles for these exchanges. At the same time, vacation home buyers and resort developers are increasingly using tenancy in common (often called ‘fractional ownership’ in this application) to share ownership and usage of vacation properties so that owners need not buy more than they can use and afford, but still get legal title to real estate (unlike in a traditional ‘time share’ arrangement).”2

A third type of tenancy in common, which will be the focus of this article, is the co-ownership of multi-unit property by co-owners who each wish to have exclusive usage rights to a particular area of the property. Rather than owning a specific unit or apartment in a building, the tenants in common each own a percentage of the entire undivided property, with a stipulation in the Tenancy in Common Agreement, (a written contract signed by all co-owners), that they can occupy a specific unit. In a Tenancy in Common, deeds only show each co-owner’s ownership percentage of the total undivided property, rather than a map, deed, or other document recorded in county records. This is a major difference from the legal subdivisions known as “condominiums” and “stock cooperatives” or co-ops, which have been legally divided into physical parts, each of which can be separately owned.

Why would someone be attracted to a TIC, with all the other types of housing available? In the search for housing, single-family homes are usually the first choice, but because of their cost, multiple unit housing has become a less expensive alternative. When purchasing a home in a multi-unit development, condominiums are generally the first choice, because, being legally subdivided as mentioned above, they are easy to finance and sell, with co-ops, again legal subdivisions, coming in second. However, when localities attempt to block conversions of apartment buildings to condominiums or co-ops by excessively restrictive regulations, yearly lotteries for only a few conversion permits, or long permitting processes, among other things, then TICs become a viable option, as they are not legal subdivisions and those restrictions usually do not apply.

Forming a Tenancy in Common can be fairly quick and inexpensive with a property of up to four units, (1-3 weeks and around $1,000), but becomes much more complicated, time consuming, and expensive on properties of five or more units, as a California Department of Real Estate (DRE) “Public Report” will be required. This takes about 4-6 months and costs around $15000 – $20000). The very first thing you should do is find a qualified attorney before entering into any TIC project, whether large or small.

There are several ways commonly used to finance TICs. The most common is the group loan or apartment building loan, which is secured by the entire property. “Under this ‘group loan’ arrangement, the tenancy in common Agreement would specify the percentage of each loan that was owed by each co-owner, each co-owner would contribute his/her share of each loan payment as part of his/her monthly ‘dues’ to the group, and the group would make each payment to the lender. While group loans remain the norm for tenancy in common financing, several banks have recently introduced programs under which each co-owner has his/her own loan. Individual tenancy in common loans are secured only by one co-owner’s percentage share in the property, meaning that one co-owner’s mortgage default does not imperil the other co-owners. Yet another popular TIC financing option is individual mortgages carried by a seller or former owner, often in conjunction with an underlying loan that predates the tenancy in common formation.”3

“Each co-tenant can sell his/her tenancy in common interest at any time, and, contrary to what many people unfamiliar with tenancies in common assume, TIC interests have been readily re-salable for at least the past 10 years. Sales of TIC interests involving group loans are typically subject to rights of first refusal and buyer approval to insure that the co-owners can vet prospective buyers and make sure they are qualified. Marketability is enhanced if, by resale time, the group has a track record of solving its problems and paying its bills, greatly decreasing the buyer’s risk”4

As you can see, this is a broad subject, requiring a lot of research and explanation. I hope that you are not cross-eyed from reading already, or that your mind is not numb with details. I will discuss other aspects of TICs in my next article, such as the TIC agreement, legal restrictions (if any) that apply to TIC formation, how fractional financing loans work, and more. Please comment or ask questions.

1. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)
2. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)
3. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)
4. D. Andrew Sirkin “Questions and Answers on Tenancy in Common” (11/01/06)