“TIC” stands for “Tenancy-in-Common”
TIC stands for tenancy in common or tenants in common. “Tenants in common” is actually a very basic legal term. It applies to the rights of parties that own or live together. A TIC is a form of title to property by more than one person. All have an equal right to use the property, even if the percentage of interests are not equal or the living spaces are difference sizes. A TIC agreement defines both group and individual responsibilities clearly. Click here for an outline of all topics covered in a TIC Agreement.
The following is an example of a Tenancy-in-Common situation, for illustration purposes:
In a TIC arrangement, there are typically 4 owners to each 4-unit property. Each owner owns ¼ of the entire building & property– a 25% share of the entire building– and accordingly carries the responsibilities of his/her 25% ownership.
Each owner is responsible for their portion of the total mortgage, determined by their purchase price.
There are several ways to finance a TIC. Two common ways of financing a TIC are a group loan and a fractionalized loan. Visit Finance section for more info.
How do TIC’s work?
TICs are buildings that do not have a parcel or final map recorded and are therefore not legally subdivided into condominiums. Many times TIC buildings were formerly used as apartment buildings. When a TIC building is first created, a real estate agent usually locates prospective buyers. These buyers will initially buy interests in the building simultaneously as tenants in common, and sign a contract called a TIC Agreement. Subsequent buyers will buy an interest in the building subject to the existing TIC Agreement. Recall from above that tenants in common have the right to occupy the whole building. A TIC Agreement is used to grant exclusive usage rights pertaining to the units in the building as well as certain portions of the common area. Without this contractual agreement an owner would not have the exclusive right to occupy his or her unit, or use a particular parking space or storage area. This contract also contains provisions, some similar to those found in CC&Rs, which govern the rights, duties, and liabilities of each owner. A governing body for the building consisting of the building’s owners is also created under the agreement. Unlike CC&Rs that normally get recorded, it is illegal to record a TIC Agreement. In housing markets where a shortage of condominiums exists, such as in San Francisco, TICs have sprung up as a way to own property.
The advantage of buying a TIC versus other types of real estate ventures is that this type of real estate opportunity makes ownership far more accessible than outright purchasing a single-family home. In a nutshell, your dollar buys you more because buyers are able to pool resources with other like-minded buyers, enabling you to purchase more and better real estate than you otherwise could or would.
As the price of real estate continues to rise, and communities implement more stringent growth and condominium conversion restrictions, more and more people are turning to TICs as a way to maximize buying and selling power. With the introduction of "fractional loans" which allow co-owners to have individual mortgages (that substantially decrease the risk of co-ownership), TICs are an excellent option when considering the purchase of real estate. For more information
please refer to the Finance section of this website.
TICs have existed for many years, but have recently become more popular, in part due to the emergence of the above-mentioned financing options and certain legal applications. In locations where condo conversions are possible, TIC owners sometimes choose to pursue conversions to reap further benefits of increased property value.
TICs vs. Condos vs. Co-ops
Both a multi-unit building and a condo share common areas, maintenance costs and individual private living spaces, but they are not the same. The differences lie in legal definition of the property, the financing structure, the purchase price/resale value, and a couple of structural specifications such as soundproofing.
TIC's are different from Condo's because TICs are not legally subdivided. Therefore legally the units in the building are not recognized as separate units. This has many repercussions, for instance, without a contract there are no rights of owners to exclusively occupy the individual units. Also owners own a percentage in the entire building and therefore are each fully responsible for all costs and liabilities of the building--unless there are contractual rights in place under a TIC Agreement defining the division of costs and responsibilities agreed upon by the owners.
Co-ops are corporations and/or limited liability companies specifically created to hold ownership of a building for the purposes of dividing interests. They are often classified by local government as a subdivision, much as a condo is classified. Accordingly, a co-op must seek the same or similar approvals for sub-division thereby increasing the cost and time of obtaining such ownership. Since the amount of work is comparable, most parties choose to pursue a condo conversion in the end over a co-op.
TICs and Condo Conversions
Depending on a local city and county in which a TIC is located, a TIC may qualify for a condominium conversion. Oakland does not use a lottery system like San Francisco. Currently there are condo-conversion restrictions around the Lake Merritt area in Oakland. Click here to access the municipal codes website for Oakland.
If a building has more than four units, the conversion process will require further approvals with the city and state. This process can be expensive, as well as take 6 months to 2 years.
An individual interest may be used as a rental income property by the owner, however there are rules for mortgages that are issued as owner-occupied. Consult with your mortgage lender (or check our Finance section to access one of our affiliates) regarding the proper product if this is your intention.
Fractionalized TIC loans are loans that are encumbered only by the obligor’s interest in the property as opposed to the whole building. Individual financing is usually preferred by TIC buyers. Specialized lenders offer this type of financing and the interest rates are sometimes higher and the qualification standards are normally more stringent. For more information on lenders that offer individual financing, please visit our Finance section.
Many TIC properties have group financing, whereby all of the owners are on the same loan and that loan is secured by the whole property rather than just one owner’s interest. In the case of default under a group loan, the other owners are at a higher risk of losing their property.
For more information
please refer to the Finance section of this website.
The contract that governs the aspects of your ownership and operation of the property on the whole is the TIC Agreement, preferably drawn up by an attorney. It also defines the individual interests and discerns between what are "general" and what are "individual" responsibilities and expenses of the building. The TIC Agreement also provides for basic dispute resolution between the parties, but is always advisable to maintain clear and open communications between the TIC owners. Click here for an outline of what's included in a TIC Agreement.
Not all TIC agreements are the same. TIC Agreements vary drastically from law firm to law firm. Even agreements that are generated by the same law firm often contain different provisions designed to suit a particular property. Since there are few laws that regulate TIC properties, it is important to have a thorough agreement that addresses various scenarios that may arise, such as cases of default or dispute, in addition to general provisions regarding the rights, duties, and liabilities of each owner.
Selling Your TIC
One of the primary attractions of TICs is that the individual owner typically need not seek the approval of the other owners to sell their percentage, such as many co-ops require. Note that you cannot sell the unit, since you do not own the unit. However, you can sell your percentage interest in the building and your exclusive usage rights for a particular unit under the TIC Agreement. Most TIC Agreements have very specific language that governs situations where an owner wants to sell his or her interest in the building, for example there may be a right of first offer, and certain approval procedures that the prospective buyer must go through. Buyers that are buying into an existing TIC Agreement should read through the entire agreement and seek an attorney to answer any questions and possibly review the agreement. TIC Partnerships also offers a robust network and online vehicle to advertise for you or your realtor.
Obtaining a PUBLIC REPORT for TICs
from the Department of Real Estate
Public Reports (“White Papers”)
& the Department of Real Estate:
The Department of Real Estate (hereafter, “the DRE”) oversees the marketing of new subdivisions in California. The DRE believes that a public report is required for sale of tenancy in common interests in buildings of five or more units where at least one unit is residential. Most subdividers (I will use the term “subdivider” throughout this article although this is not legally a subdivision) are obtaining a Public Report for these sales to avoid the risk of DRE sanctions and possibly enhance the marketability of their property. Public reports contain essential information for prospective buyers including covenants, conditions and restrictions which govern the use of property, costs and assessments for maintaining homeowners' associations and common areas, and other material disclosures. Prior to the issuance of the public report, the subdivider must file an application with the DRE and submit supporting documents. If improvements to the subdivision are not complete at the time the application is filed, the subdivider must also submit evidence that adequate financial arrangements have been made for their completion. After the subdivider conveys the last remaining lot/unit in the subdivision, the DRE's oversight ends and the homeowners association operates the subdivision. Approval is not required for TIC resales.
Obtaining a public report will involve hiring a variety of professionals who will work together as a team to assemble your application. You will hire an attorney, a map surveyor, a title company, and a budget preparer. In addition, the DRE charges various fees for the different types of reports. We estimate the total cost to be between $15,000-$20,000.00.
• Your attorney would draft the Sample Purchase and Sale Agreement, the TIC Agreement, the Memorandum of the TIC Agreement, the Sample Note and Deed of Trust, Sample Junior Note and Deed of Trust (if seller-financing may be offered), a detailed Explanation of Financing Letter, and when requested by the DRE, a draft of the final public report, and the RE 648 form. Please inquire for affiliates.
• The title company will prepare most of the forms required by the Department of Real Estate for free provided you close your escrow with that company and choose them for your title insurance.
• The map surveyor will take measurements, survey the property and draft unit diagrams. Fees will vary, for a 5-6 unit building we estimate around $3,000.00. The price goes up $300.00 for each unit above the initial five units
• The budget preparer prepares the budget for the project. They charge a flat fee around $2,500.00 - $3,700.00, depending on your project. This includes, answering deficiency notices, filling out 624A, and drafting certain exhibits based on the TIC Agreement.
• For a final report, the DRE charges a $500.00 base fee+ $10 per interest. There are also different fees for preliminary public reports and conditional public reports.
Risk Reduction Requirements
One of the DRE’s primary concerns is that due to the inherently risky setup of TIC agreements buyers are in a position where they could lose a lot if there are not adequate protection measures in place. Of special concern are properties containing blanket encumbrances, where the non-payment by another party could jeopardize an innocent owner. Therefore, the DRE imposes the following requirements for properties that have a blanket encumbrance:
• The “HOA default fund”: Unless 80% or more units close at the same time, the subdivider will need to deposit cash or a surety bond into escrow for the equivalent of six months worth of Homeowner’s Association dues. These dues will be determined based on the professionally prepared budget. This money is held until 80% of the TIC units close, unless the seller fails to pay the homeowner’s monthly dues for the unsold TIC units. If this occurs, money from this fund may be used towards payment of the homeowner’s monthly dues for the unsold units.
• The “presale requirement”: If there is a blanket encumbrance, unless 80% or more units close at the same time, the seller must either deposit into escrow cash or a bond in an amount equivalent to the balance owed on the loan until 80% of the TIC sales close.
• The “mortgage default fund”: Currently the law does not state who is responsible for placing money into this fund. There are three options: 1. The seller could place the money into the fund, 2. The buyers could be required to place the money into the fund directly, or 3. The sale price of the units could be raised so that the seller could take that excess money and place it into the fund.
• • A. If there is a blanket encumbrance: The equivalent of six months worth of payments on the loan subject to the blanket encumbrance must be placed into this fund prior to the close of the first escrow. If one or more buyers do not pay his or her share of the mortgage, money from this fund may be used to protect the interests and credit of the co-owners.
• • B. If there is not a blanket encumbrance: The equivalent of two months worth of assessments must be placed into this fund.
Types of Reports
A Final Public Report is the main report that allows you to market, advertise and enter into sales contracts. There are two optional types of reports for TIC subdividers who have not previously obtained a final report:
• Preliminary Public Report: This optional report is issued before the Final Report, in the early stages of applications. It allows you to take non-binding reservations on the units, as well as advertise and market the project.
• Conditional Public Report: This optional report allows you to enter into binding contracts for the units, however the subdivider cannot close escrows until the purchasers have received the Final Public Report. The Conditional Public Report is rarely used in TIC scenarios.
Estimated Time & Disclaimer
A final report generally takes anywhere from 6 to 12 months to obtain. All efforts will be made on our behalf to promptly respond to any DRE’s requests related to the documents that we drafted. However, this law firm does not guarantee that a final report will be granted. Once the DRE has all of the necessary documentation, their decision to either grant or deny the issuing of a public report is entirely in their control.