Tenancy in common buyers and their real estate agents frequently ask: “What should I be worried about?” This list of key TIC questions, presented in order of descending importance, is designed to help buyers and agents focus on the most important issues in tenant in common transactions.
1. Will there be blanket financing (a loan or loans secured by the entire building)? If so:
A. Will the existing loan(s) remain in place, or will there be a new loan?
2. Will there be individual financing? If so:
B. If there will be a new loan, will the buyer be able to obtain a large enough share to meet his/her financial needs? Will the owner group cooperate in the refinance process? How will the loan be chosen? How will the costs of the new loan be shared?
C. If there will not be a new loan, will the buyer formally assume the existing loan(s)? What steps are required for an assumption? How much will it cost? How long will it take? If the buyer will not formally assume the new loan, has the buyer assessed the risk of violating the “due on sale” clause? Is consent of the other TIC owners required in order to skip the formal assumption process?
D. What is the relationship between each TIC owner’s loan amount and the value of his/her assigned unit? Are there TIC owners with little or no equity? Are there any of the tenant in common owners “under water”?
A. Is the tenancy in common agreement written for individual loans? Will it satisfy the requirements of the Buyer’s lender? If the lender requires changes, who will pay the attorney fees? If the lender-required changes are rejected by the other owners, will the buyer be able to terminate the purchase contract?
B. Some of the TIC agreement provisions required by lenders providing individual TIC financing can be onerous, and should be reviewed carefully by the buyer. For example, many lenders insist on having the right to remove the building from the rental market following foreclosure on a unit with a low-rent tenant. This will mean that renters in all units must be evicted, and that no rentals will be allowed for a period of years. Another frequently require provision is that lenders must approve all amendments to the TIC agreement.
1. Is there a memorandum of agreement recorded? Recording a TIC agreement is illegal, but owners are allowed to record a short (typically one page or less) memorandum of agreement stating that a TIC agreement exists. Recording a memorandum of agreement provides the owners with critical legal protection in several situations, including when one owner goes bankrupt.
2. Is the TIC agreement signed by every owner of record? The first purchasers should have signed the agreement itself, and subsequent buyers should have signed an amendment or assumption of obligation form. Every buyer should compare the names on the preliminary title report with the signatures on these document before closing escrow.
1. Will the buyer’s unit be delivered vacant? If not, will the buyer have grounds to evict the tenant if the buyer wants to live in the unit?
2. Will the buyer be permitted to rent out his/her unit in the future? Will the eviction history of the building prevent rentals, or limit the rent the buyer can charge? Does the TIC agreement impose restrictions or requirements on rentals?
3. If the buyer rents out his/her unit in the future, will he/she, or a future buyer, be able to evict the tenant and move in? Note that owner move-in evictions require at least 25% ownership of the building, and are limited in other important ways. In addition, some TIC agreement require group consent for certain evictions because they can affect the ability to convert to condominiums.
1. What conversion eligibility requirements apply to the building? Will past evictions impact its ability to convert? How many units are owner-occupied, and how long has each owner lived in the building? How many times has the building entered and lost the conversion lottery, and how many of these past losses will count for future lottery priority?
Space Assignments and Usage Restrictions
2. Does the TIC agreement require owner-occupancy and, if so, for how long?
3. Does the TIC agreement require that the owners convert if and when the building qualifies?
4. How will the costs of conversion, including required repairs to unit interiors, be shared? Are there any non-permitted elements of buyer’s unit or deck area that buyer might be required to remove or demolish in connection with a condominium conversion?
1. Are the buyer’s parking, storage and exterior areas clearly defined on a drawing? Can the buyer determine the exact boundaries of the spaces assigned to each owner? Will buyer’s parking space be accessible independently no matter where each of the other owners park within their parking space boundaries? If not, are there key sharing provisions that will not be overly burdensome and inconvenient?
2. Does the buyer have adequate remedies if another owner improperly stores items in common area, or places furniture in common area without prior agreement?
3. Is it clear which elements of the building are maintained by individual owners and which are maintained by the group?
4. If the buyer is planning additions or renovation, does the TIC agreement impose any prerequisites or requirements?
5. What noise mitigation measures (such as floor covering or stocking feet) can buyer require of other owners, and what can other owners require of buyer?
6. Will buyer’s pet be permitted, and what restrictions will apply to the pet’s use of exterior areas?
1. Is a repair/replacement reserve included in budget and dues? Have it been calculated accurately and scientifically?
2. Is the repair/replacement reserve in a segregated bank account? How does the repair/replacement account balance correspond with inspection reports?
1. If there is blanket financing, are the mortgage payments being made to the group bank account as part of the dues (rather than by individual owners directly to the lender)? It is too risky to allow individual owners to pay the bank directly on a loan secured by the entire property, even if one owner is obligated to pay 100% of the payments.
2. Do the owner dues include all of the anticipated expenses, including property tax and insurance? If not, is there a clear methodology for collecting costs not included in the dues?
3. Is the group current on collection of property tax, including anticipated increases based on past sales or renovations for which the City has not yet billed?
4. Are all owners current in their dues? Do the recent bank statements reflect consistency in owner payments, or have some owners been late?
5. Is there a default reserve fund? This is an account set aside for use by the group to pay bills if an owner does not pay his/her dues. Note that a default reserve fund is not the same as the repair/replacement reserve (for building maintenance) described above.
6. If there is blanket financing, has the buyer obtained current financial statements from the other owners, and do these show that all owners continue to be capable of making their payments?
1. Is there a formal system in place for managing both the bookkeeping and the cleaning/repair of common area? Will that system ensure that some specific person will be responsible for each of these tasks at all times?
Buyer’s TIC Attorney
2. Is there a governing board and, if so, which decisions are reserved for owners? For owner-decided matters, which decisions require a super-majority or unanimous vote?
3. When did the owners last meet? Are there meeting minutes or another record of owner decisions?
4. Is there a schedule of fines and penalties?
1. How many years has the attorney been handling TIC work, and how many TIC groups has the attorney assisted?
2. How many TIC interests has the attorney owned?
3. How many TIC buildings has the attorney lived in, and for how long?
ABOUT THE AUTHOR
Andy Sirkin has prepared close to 3,000 occupancy-based TIC agreements for properties of every size and type, and continues to assist in the vast majority of these transactions in California. Andy has owned 11 TIC interests in San Francisco, of which four have converted to condominiums, and he currently owns three SF TICs (one of which is his SF home). He has lived in TIC buildings for more than 15 years. He has also developed TIC projects, managed TICs for himself and others, and operated a real estate brokerage specializing in TIC transactions.
Our tenancy in common practice involves general advice and counseling, TIC agreement preparation, loan documents, and ongoing consultation to developers, seller, Realtors and TIC owners, on either a flat fee or hourly basis. We have a well-deserved reputation for returning calls promptly and providing fast turnaround times. But more important, we are known for finding creative solutions, calming fears, and finding common ground, so that transactions and relationships work. Although our role usually begins at the time the tenancy in common is first formed or sold, we are committed to remaining available to solve problems throughout the life of each TIC. Contact us via email at DASirkin@earthlink.net, or by telephone at 415-738-8545.