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TICS AND FRACTIONAL
LOANS: EASIER AND EASIER TO OWN TICS
The Problem:
“TICs” refers to
property owned by multiple people as Tenants in Common and are an
increasingly popular way for people to purchase units in a building to
live in without having to convert the building to a condominium. As
discussed in our articles on
Tenancy in Common and
the Newsletter on
TIC Financing, one of the chief drawbacks in creating,
buying or selling a tenancy in common ownership was the complex bank
financing often required. Unlike condominiums in which each unit is
separately financed, TICs were normally financed in whole, so that each
owner was jointly and severally liable for the entire loan and the
entire building was pledged as security for each loan.
This could lead to
problems if a single owner defaulted on payments or wished to borrow on
or refinance their “share” of the loan. As discussed in our previous
articles, this required complex and powerful provisions in each TIC
Agreement to allow for efficient and fair treatment of the financing
aspects of TIC ownership. As one TIC owner commented, “This makes
everything connected with a credit line or selling so much more
complicated, doesn’t it?” TICs were still worth while and saved
hundreds of thousands of dollars, but one had to assume that
restrictions on the borrowing rights on the property and the exposure
due to other TIC owners not fulfilling their obligations were issues to
be carefully considered.
The New Solution:
“Fractional Financing.”
The rapid growth of
TIC ownership has alerted more and more banks to the potentially large
market of home owners that might be interested in obtaining a type of
financing that would allow them to finance their particular TIC unit
rather than have to be jointly and severally liable for the entire
borrowing of all the owners and, beginning in 2005, various banks in the
Bay Area “experimented” with “fractional loans” that allowed such
financing.
The success of these
loans has led to increasing numbers of banks entering the market and
those banks now exist in communities far outside the San Francisco Bay
Area. With these fractional loans, there is a separate loan for each TIC
unit with each loan involving a note signed only by the owner of a
particular TIC interest, secured by a deed of trust covering only that
owner’s TIC share. If one owner defaults on the loan, the lender can
foreclose only on that owner’s particular interest. Unlike group
financing, none of the other TIC owners are directly affected by the
particular default.
The banks require a
contractual right to foreclose on a particular TIC interest so the
documentation is quite different than a typical condominium loan. The
various statutory methods for foreclosure of a Deed of Trust do not
automatically apply and the banks thus have to create foreclosure
methods in the loan documents. The result of the need for such
additional work makes the TIC loans more expensive to obtain than
typical condominium loans, though it is our experience that the economic
advantages of owning a TIC still far outweigh the additional financing
cost and, of course, avoiding the group financing is a tremendous
advantage to all the TIC owners.
Typically, a TIC
loan is one to two percent higher than a condo loan and is more limited
in time, usually ten to twenty years rather than thirty years. But this
writer predicts that as the market broadens and banks become more
comfortable with the concept, we can expect the differential to lessen
over the coming years.
The Effect: A Growing
Market:
While fractional
loans are new to the TIC market, they are actually an old concept long
used for vacation rentals and certain developments. Given the huge
interest in TIC ownership in urban areas, it is likely that the banks
will quickly grasp the relative ease of using this methodology in
expanding their home ownership loan portfolio.
It may take some
time…perhaps a few years…but it is likely that soon banks will have TIC
departments well versed with the intricacies of this type of loan and
able to process them as easily as the typical condo loan. Unless we
experience the long touted “real estate market melt down” one can expect
TIC financing and equity lines as readily available as condo financing
within a decade.
Which means that
those purchasing TICs in the past and those buying them now will find
their investments more valuable as more and more of the buying public
witness the relative ease of the financing of these types of properties.
It also means that many TICs already existing with group financing are
likely to alter to fractional financing to achieve the same benefits.
Those who have
resisted the growing popularity of TICs as threatening availability of
apartments are distraught since a good TIC agreement coupled with
fractional financing will allow TIC owners to enjoy most of the benefits
of condominium ownership without the cost and delay so often
experienced. Indeed, some condo owners now fear that TIC popularity will
undermine the condo market by making a viable alterative readily
available.
But the wealth of
statutes and case law involving interpretation of statutory protections
created for condos and their associations will still give a definite
benefit to that form of ownership, and many buyers of property, who do
not hesitate to buy a condo despite hundreds of pages of condo rules and
restrictions being imposed still view the typical fifty page TIC
Agreement with a degree of nervousness.
In short, TICs will
increase in value and popularity but are unlikely to replace condominium
ownership as the preferred method of group ownership of property. People
will buy TICs for the lower cost of entry into home ownership rather
than preference for that style of ownership.
But, as one
apartment housing activist decried, “This is the end of our efforts to
stop the wholesale destruction of affordable rental house.” An
exaggeration, certainly, with rents going up…but the past efforts to
stop conversion by legislating against condo conversion will certainly
no longer be as effective as before. The TICs will simply multiply while
the condos are artificially restricted.
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