As the Southern California real estate market has become increasingly “hot”, both buyers and sellers are looking for creative ways to buy and sell property. One method that has emerged and is becoming popular is Tenancy In Common (or “TIC”) in apartment buildings and multi-unit properties. In this article, we discuss what a TIC is, why it is becoming more popular, and the drawbacks.
What Is Tenancy In Common?
Tenancy in common is a form of co-ownership where two or more owners own partial interests in a property. Typically, tenants in common all have the right to equal access to the property, regardless of their percentage ownership interest. So, for example, if a couple purchase a home together as tenants in common with one owning 25% and the other owning 75%, each individual retains the right to access the whole home.
An increasingly popular arrangement is to combine TIC ownership with exclusive use and Tenancy-In-Common-Agreements. By way of these agreements, co-owners can effectively own an entire property together, while retaining the exclusive right to use a specific unit or units within the building. Any areas that are not designated for exclusive use, like walkways, rooftop decks, etc., are common area that all owners may access. The exclusive use and Tenancy-In-Common Agreements designate which areas are for exclusive use by specific owners, which areas are for common use, and how the common use areas are to be used and maintained, much like CC&Rs in an HOA.
Tenancy In Common Provides Flexibility For Sellers And Affordability For Buyers
The TIC arrangement has become particularly popular with sellers attempting to sell multi-unit properties or small apartment buildings. By utilizing a TIC arrangement along with exclusive use, the seller is able to sell each unit separately. There are a number of reasons why a seller may choose to sell the units individually as opposed to the building as a whole, with the primary reason being the all-important dollar. For a building that is aged with increasing maintenance costs, or a building that is not generating significant revenue, a seller in today’s market may be able to generate a higher collective sale price by selling each unit separately as residential units rather than the entire building to an investor-buyer.
Buyers, on the other hand, are drawn to TIC properties due to their relative affordability. TIC units tend to sell for less than comparable properties. According to an article published in the Los Angeles Business Journal, a TIC unit in an apartment building generally sells for 10% to 20% less than a comparable condo. Of course, as discussed below, that savings does not come without some potential risk and cost.
Limited Lender Options And Property Tax Risks With Tenancy In Common
There are two primary drawbacks to purchase a TIC property: limited lender options and property tax risks.
Tenancy in common is not a traditional method of owning a particular unit within a building or property, and TIC ownership makes up a relatively small part of the real estate market. As a result, there is no secondary market for these loans, i.e. Freddie Mac and/or Fannie Mae will not purchase the loans, and thus the lenders generally must keep the loans on their books until they are paid. As a result, there are very few lenders who will issue a loan in connection with a TIC purchase. The lenders who do issue loans for these properties generally charge higher interest rates than traditional loans, and there usually is no 30-year option for a TIC loan. As a result, while a TIC unit may appear to be cheaper based on the price tag, some of that savings is offset by the higher interest rate on the loan.
There is also a property tax risk associated with TIC ownership. Because all co-owners co-own the entire property, i.e. the property is not subdivided, all owners share the property tax bill. If one owner does not pay his/her portion of the property tax bill, the unpaid portion remains as a lien on the entire property. This can potentially create issues when attempting to re-sell an individual unit. Because outstanding property taxes must be paid in connection with a transfer of real estate, it is possible that one owner would have to pay another owner’s property tax in order to sell his or her unit.
In short, while there are various benefits to tenancy in common ownership, there are also countervailing drawbacks. The good news, however, is that property owners have found a new creative way to increase inventory in the Southern California market, which provides a viable alternative to traditional home-ownership.
If you are interested in learning more about TIC ownership, or for more information on how Esquire Real Estate Brokerage can help you in the Southern California real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.
