TICs are a small niche within the LA real estate world. It’s a specialization that came very naturally to me. In the 1990s, a close friend developed TIC communities in San Francisco. I was not yet in the real estate business, but I would visit the projects in various stages of their development and was impressed with the business model. When I started my real estate career in New York City in 2005, most properties I sold were Co-ops; they are similar in structure to TICs but use a corporate structure of co-ownership rather than a personal one. After 9 years of selling co-ops in New York, I moved to California in 2014 to be near family. I rented a classic Art Deco Spanish apartment and dreamed of converting it into a condo. One of my early calls upon moving home was to my old friend to discuss converting these beautiful rental apartments into for-sale units. After much research, I realized that public policy in Los Angeles made conversion difficult and expensive. In 2016, I started the discussion of working with my San Francisco contacts to create TIC communities in Los Angeles. We lobbied Sterling Bank to start offering TIC mortgages in the L.A. area. We re-engaged with Andy Sirkin, the attorney who created the legal framework which made TIC a viable method of ownership in the 1990s. By 2017, I started my first project in Los Angeles and another in San Francisco. The TIC model was a creative way to help investors build wealth and offer reasonably priced homes to first-time buyers.
The TIC Agreement (TICA)
A Tenancy-In-Common Agreement is a legal document every co-owner must sign before closing escrow. It assigns which unit or “air space” you’ll exclusively occupy. Just like a condo, it explains the HOA fees, which cover common expenses such as water, gardening, building insurance, and maintenance of the property. A TIC agreement is like a “prenup” for real estate; it offers protection and solutions to problems that might arise between co-owners. The TIC agreement is the glue that holds the TIC group together and creates security for all owners.
How is a TIC different from a Condo?
What’s the main difference between a TIC and a Condo? When you purchase a TIC with occupancy rights, you own title to a percentage of the entire property in common with other building owners. In other words, buying one unit in a four-unit building gives you 25 percent ownership of the whole building & land. With a condo, the property is divided into physical parts that are individually mapped and recorded in public records. Each owner has a deed that defines precisely which part of the shared property they own – “Unit 4D, northeast corner,” for example. Tenants-in-common, however, own percentages in an individual property. Their usage rights to a particular area of the building (“Unit 4D, northeast corner”) are spelled out by a contract (TICA), as are their rights and obligations as owners. This contract between co-owners is not recorded in county real estate records.
Financing Your TIC home
There are two primary types of financing for your TIC home purchase: a Fractional Loan (the favored choice) or a Group Loan (not recommended).
Long ago, group loans were the only game in town; they consisted of a single loan covering all units (the building). Group loans are used chiefly for families buying together. Co-owners are financial partners on one mortgage with shared risk. The disadvantage is that the entire group could face foreclosure if one party defaults. You manage this risk by thoroughly investigating new co-owners before allowing them to purchase, keeping a reserve account with sufficient funds to cover any shortfall, and maintaining strict internal management. In practice, defaults on these loans are rare, but most buyers would prefer the more straightforward alternative to this type of mortgage – the Fractional Loan.
Fractional Loans have been available for years and have become the preferred method for financing TICs. Each loan involves a note signed only by a particular TIC owner and is secured by a deed of trust covering only that owner’s share. Unlike group financing, none of the other TIC owners are impacted by a default or foreclosure. Fractional loans are like condo loans, with a few exceptions. Since TIC mortgages comprise a small portion of the market nationwide, there is no secondary market for banks to sell these loans. Therefore, all TIC mortgages are portfolio loans, meaning they stay on the originating lenders’ books until they are paid in full. This makes the loans riskier for the lender, and the rates are slightly higher than those of conventional loans. As a specialized product, only a few smaller banks offer TIC loans; in the more mature SF/Bay Area market, six lenders offer TIC mortgages. Since the Los Angeles TIC market is younger, only two lenders are currently active. As it matures, we will likely see more banks embrace TIC loans. Additionally, TIC buyers will, on average, need to be stronger applicants than your typical condo buyer. TIC mortgage lenders reduce risk by requiring slightly better credit scores, more substantial income history, and a higher average down payment. While this creates a somewhat smaller pool of applicants, it helps ensure the financial viability of your co-owners, which makes the overall community stronger and defaults quite rare.
Is my TIC mortgage tax deductible?
Yes. The mortgage interest that you pay on your TIC fractional loan is tax-deductible, as are property taxes, just like a condo. Always consult your tax advisor for details on how to maximize the benefit of homeownership. If you don’t already have a good accountant and you’re becoming a homeowner, it’s time to get one. A good tax consultant will be up to date on any changes to the tax code to help you get every possible deduction.
Final Thoughts
In Los Angeles and the SF/Bay Area, TICs are typically created from 2-8 unit rental buildings with the character and location to become successful for-sale properties. San Franciscans are familiar with TICs as they comprise approximately 35% of the for-sale apartment market. New Yorkers have a similar product with their massive co-operative (co-op) apartment market. With their tradition of single-family homeownership, Angelenos are less familiar with TIC ownership. However, the demand for these properties is growing fast (always a great time to invest!). TICs are most valuable when the local condo conversion rules are too strict to allow approval. Sadly, local zoning laws encourage the demolition of vintage properties in favor of creating larger rental buildings with plenty of underground parking. At Best Coast Properties, our goal is to preserve and restore these beautiful early 20th and mid-century buildings to create affordable options for first-time and middle-income buyers currently priced out of the market. TIC conversion is an exciting way to retain a community’s character and charm while providing inventory to an underserved segment of the market. TICs are great for buyers and the investors who create them. It’s a win-win situation in the real estate world.