Q: I notice that TIC sales are becoming somewhat common in our area. I have a Buyer who has been looking at condominiums, but now has noticed a TIC unit is for sale. How are TICs different from condos, and what do I need to know to work with this Buyer on a TIC purchase? This is all new to me.
A: You are wise to be asking about this legal topic. Here are the answers to the most frequently asked questions:
- WHAT IS A TIC? A TIC is a way to own real property where the owners each have an undivided interest in the entire property. Those interests and obligations are all equal; and each undivided interest can be sold by its owner.
What makes a TIC special is that it is a way to own an undivided interest in residential property with a contractual right to occupy one of the units; it may also allow access to a specific parking and storage space. A TIC looks a lot like a condominium or other Common Interest Development (“CI”) but there are several distinct differences:
- The TIC owners are bound by the governance method specified in the TIC Agreement, thus acting in a similar manner to a HOA Board of Directors.
- TIC governance is dictated by a TIC Agreement that should only be written by attorneys, whereas CI governance is primarily mandated by California statutory law.
- As with CIs, there is a structure for assessing fees, usually monthly, for common expenses; however, the ability for the TIC governing board to collect fees from members is often less effective and punitive than what would be allowed by a HOA Board.
- The obligations of a Seller of an individual TIC unit to make disclosures, especially financial disclosures of operations of the TIC itself, are not as complete as the requirements for a CI Seller which are detailed in the California Civil Code
- On a purchase or resale of a TIC unit, it is usually difficult for a Buyer to obtain financing; many institutional lenders will not agree to fund a loan secured by a lien on the individual fractional interest of the Buyer.
2. WHAT INFORMATION DOES THE BUYER OF A TIC UNIT NEED? TIC Buyers must be advised that ownership and any future sale of a TIC unit will be different from owning and re-selling a unit in a CI.
In addition to the usual investigations and inspection of the unit and common areas of the TIC building, the Buyer will need to carefully review and approve the TIC Agreement. Regardless of who prepared the TIC Agreement, the Buyer’s Agent should advise the Buyer to have that document reviewed by a qualified California real estate attorney, preferably one who is familiar with the creation of TIC Agreements.
Financing can be difficult because few institutional lenders are willing to make a loan secured by a fractional interest in a whole property. Availability of these loans varies by area and are affected by market conditions.
Just as is true with the initial sales of a CI and other types of subdivisions, if the TIC Agreement controls more than four units, the Seller must obtain a Public Report from the California Department of Real Estate.
3. WHAT TIC SALE FORMS SHOULD BE USED? Currently, there are no CAR forms for selling TIC units. However, because TIC sales have become a significant portion of the sales in San Francisco for more than 20 years, the San Francisco Association of REALTORS® (“SFAR”) has developed three forms for use with TIC sales.
Through an agreement with CAR, the SFAR TIC Purchase Addendum, TIC Advisory and the TIC Financial Disclosure Statement forms are available for all CAR Members to use. Copies of these three forms are attached. Because the SFAR TIC Purchase Addendum does not reference any specific purchase agreement paragraph numbers, it can be used with the CAR RPA (and other purchase agreement forms, such as the PRDS Real Estate Purchase Contract).
However, we recommend that if non-SFAR agents use the SFAR TIC Addendum with the RPA or other purchase agreement form, that they state in the purchase agreement’s “Other Terms” or in an Addendum:
“The attached TIC Addendum is included in and incorporated into this Agreement. If there is any conflict between the terms and conditions in the Agreement and the TIC Addendum, the TIC Addendum shall control. The word “days” in the Addendum shall mean the same as “Days” as defined in the Agreement.”
4. HOW DO NON-SFAR MEMBERS ACCESS THE SFAR TIC FORMS? Agents who want to access the SFAR forms library, including the three TIC forms, should follow these 6 steps:
- Open ZipForms
- Click on “Shop” in the blue toolbar on top near the far-right side.
- When the “Shop” page comes up, click on “Forms.”
- Scroll down to the SF Assoc. forms package.
- You then “purchase” the forms package by adding it to your shopping cart, but there is no cost.
- Once you complete the purchase, the TIC forms package will be listed as part of the forms available on the ZipForms Library.
5. HOW CAN AN APARTMENT BUILDING BE CONVERTED TO A TIC FOR SALE OF INDIVIDUAL UNITS? If Owners of a multi-family property are considering converting that property to a TIC so as to sell each unit, they should be encouraged to consult with a qualified California real estate attorney, preferably one who is familiar with the creation of TIC Agreements AND who has extensive experience in dealing with all of the issues that can arise with any existing Tenants in the property. Although some Tenants may well be potential Buyers for the TIC units, other Tenants may attempt to legally block the Owners’ efforts to create a TIC. To avoid claims and lawsuits from the Tenants, the Owners need to utilize the services of an experienced TIC attorney before they discuss anything with the Tenants.
PRACTICE TIPS:
- Prior to using the three SFAR TIC forms, make certain that you carefully READ all three forms. You need to understand how the TIC sale is different from a typical CI sale.
- When representing a Buyer of a TIC unit, give the Buyer copies of the three SFAR TIC forms along with the Purchase Agreement form and all other forms that you customarily give Buyers of residential property.
- Be aware that obtaining financing for Buyers of a TIC can be difficult and may not be possible in some instances. Therefore, the Buyers will need to explore their financing options before writing the TIC offer.
- If the property consists of more than four TIC units, there must be a DRE Final Public Report before the sale can be closed, and a Conditional or Final Public Report should be delivered to the Buyer before a contract can be ratified.
- Before a Buyer of a TIC unit signs any purchase documents, advise the Buyer to consult with a qualified California real estate attorney who has expertise in drafting TIC Agreements so that the Buyer can obtain appropriate legal advice about the TIC.
- When working with an Owner of property who expresses an interest in converting an apartment building to individual TIC units for sale, advise the Owner that it is critical for them to retain the services of a qualified California real estate attorney who has expertise in drafting TIC Agreements and AND who has extensive experience in dealing with any and all issues involving the existing Tenants in the property. The Owner should not attempt to commence the conversion process without proper legal representation.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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