The Ins and Outs of Individual TIC Loans
by D. Andrew Sirkin

Q. Is individual TIC financing possible and how does it work?

A. TIC owners have title to percentage shares of a single property rather than particular units or homes. Historically, the only bank financing available for TIC owners was a traditional home or apartment loan, secured for the entire property, on which all owners acted as co-borrowers. This type of collective financing exposes each owner to the risks associated with another owner's nonpayment. These risks can be managed and minimized by careful TIC structure and good documentation but cannot be eliminated as long as the group shares a single loan.

Individual TIC financing means separate loans for each fractional owner. Each loan involves 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 a particular owner defaults on his/her loan, the lender can foreclose on only that owner's share. The foreclosed share is then sold, and the buyer acquires the defaulting owner's interest. Unlike group financing, in this situation none of the other TIC owners are affected by the default or foreclosure.
Individual TIC financing is not the same as individual condominium financing and does not turn a TIC interest into the equivalent of a condominium. Since a TIC owner does not have title to a particular unit, an individual TIC loan cannot be secured by a particular unit. So just as TIC owners rely on a contract (the unrecorded TIC Agreement) rather than a deed for their right to occupy a particular apartment, TIC lenders must do the same to guarantee that they will be able to deliver those same occupancy rights to a foreclosure sale buyer and thereby generate enough sale proceeds to repay the defaulting owner's debt. The inability to secure individual TIC loans with particular units makes TIC loans more risky for the lender than condominium loans, just as TIC ownership is more risky for the owner than condo ownership.

Individual TIC financing is not a new concept. Private lenders, especially sellers of TIC interests carrying a portion of the sale price to supplement a buyer's down payment, have used individual notes and trust deeds successfully for at least 20 years. More recently, developers of fractional vacation-home projects have offered individual bank financing. Individual TIC financing is also created automatically whenever title is held by multiple owners, but only one of those owners signs the trust deed. This situation has occurred with sufficient regularity to create a body of law related to foreclosure on partial interests.

The spate of recent publicity and excitement over this financing resulted from the announcement by several local banks that they were either offering or considering individual financing for co-owner-occupants of apartment buildings. These announcements are a natural response to the growth and maturity of the TIC market. Banks can now look back at over 20 years of significant TIC activity for statistics on defaults and resales. This record provides assurance that TIC projects do not present a significantly greater risk than other types of home lending and probably present less risk than apartment loans to investors. In addition, banks recognize that the growth in the TIC market, particularly for buildings of 5-to-30 units, creates an enormous volume of potential loans and increased profit.

Q. What kinds of individual TIC loans are available now?

A. Bank of Marin, the first bank to actually offer individual loans for apartment-building co-owner occupants, approved a small pilot program that is already fully committed to roughly 10 projects involving buildings of five or more units. The program packages an acquisition and construction loan for a developer with individual TIC “takeout” loans for the ultimate occupants. Rates on these loans will be 1% to 2% higher than condo-loan rates, and the loan term will be limited to 10 years. The bank says it will consider further loans only after the initial group closes and has seasoned for at least several months.
Another local lender has tentatively decided to provide $20,000,000 of individual TIC loans for buildings of two-to-six units, including refinances of existing TICs. The details of this program have not been finalized, but preliminary indications are that the loans will be fully amortized over 30 years.

Several other lenders are in the preliminary stages of considering similar programs but will probably not announce them until the first few Bank of Marin transactions have closed.

Q. How might the availability of individual TIC financing affect the TIC market and San Francisco housing policy?

A. The TIC market has experienced explosive growth over the past three years, and the potential availability of individual loans will certainly accelerate this growth, particularly for buildings containing more than 10 units. But uncertainty about the availability of these loans will moderate their market effect, at least during the next 6-to-18 months. Beyond that point, if individual loan availability develops and expands as expected, the effect on the TIC market, homeownership demographics and, ultimately, San Francisco housing policy, is likely to be dramatic. In fact, it is not wildly optimistic to believe that the increasing popularity of TIC ownership, coupled with the widespread availability of individual financing, could finally create the conditions required to end the disastrous rent-control/anti-growth housing policies that have plagued San Francisco for the past 25 years.