What’s wrong with TICs? In a nutshell …

September 15, 2018
Well, really not all that much. Let me break it down for you …
Your regular lender will not lend on a TIC. You need what is called a “fractional” loan, which is similar to what is used to buy a Co-op in NYC. For this, you need a special lender – there are several. Sterling is my go-to, Bank of Marin, NCB, Bank of SF to name a few. Please ask me for a referral.
TICs are really very similar to condos on a day to day basis. The legal difference is that the condo is an official subdivision creating separate legal title, while a TIC represents a percentage undivided interest in the whole property with a legal contract that says who can use what. More info on exactly what a TIC is here.
Which buildings were eligible for condo conversion used to be fairly simple, but there was a lottery and a big backlog of people waiting to convert developed. In 2013 the city decided to speed the process up for them, but they also either slowed it down or ended it for everyone else. The value of an existing TIC can be is greatly affected by where they fit in this picture. There are more changes ahead and no one really knows what will happen to those units currently in-eligible. The reasons for this are political as the creation of TICs and tenant evictions are heavily linked historically. Discouraging TIC creation and condo conversion is seen as protecting rental housing stock by some people. The best article I know about who is eligible and who is not under the “new” 2013 law is here.
Legal Articles regarding San Francisco Real Estate
The disadvantages of TICs are:
  • need the fractional loan which has an up front charge of 1% and only available 3/5/7 year fixed ARM (30 year term).
  • escrow will be a little longer – fractional loans take time to process
  • there are no downpayment options below 15%
  • fully subject to rent control if you move out and rent it. More info on rent control here.
  • you will want to condo convert if you become eligible. This is a + because the value will go up and a – because you have to go through the process which is pretty extensive and work with the city/lawyers/surveyor, etc.
The advantages of a TIC are:
  • usually between 10 and 25% less expensive for a condo with exactly the same functionality and livability. This is mostly because of perception and may or may not even matter to you. The wide range of difference between 10 and 25% mostly depends on the ease with which you can convert to condo which ranges from very easy to, well, maybe never. More info on Condo conversion here.
  • Potential upside from condo conversion
  • If you start your own TIC (by buying a multi-unit building that has never been one before and dividing it up yourself with your partners/lawyer) you can create significant value and also obtain an un-remodeled place you can use to create even more value. Most people do not choose this option.
The advantages of a condo are:
  • You can use any lender
  • You are exempt from the rental increase provision of rent control – meaning you can raise the rent whenever a lease ends.
  • Condos built before 1978 are still subject to the portion of rent control that protects tenants from eviction – meaning you can’t just ask someone to leave because you want to sell it for example.

Recommended TIC Lenders

TIC Interest Rates for Multiple Banks