San Francisco Real Estate - Residential

Issues with TIC resales in San Francisco

A reader asks:

I heard that resale financing is the largest risk when purchasing a TIC. Can you explain why this is true?

Our reply:

Until recently any TIC building was secured by one loan on the entire property. When one person wanted to sell their interest, the whole property would have to either be refinanced in order to liquidate any equity that might have built up, or the person selling would have to carry the secondary financing or a personal note in order to make up the difference between the existing financing, the down payment and the purchase price.

For example: Let's assume a 3 unit building was purchased 5 years ago for $900,000 (that's $300,000 per unit) and an 80% loan was obtained - $720,000 ($240,000 per unit). If the property appreciated 5% per year the current value would be approximately $1,150,000 (($383,000 each). So if a unit's owner wanted to sell their interest for $383,000 and there is only a loan value of $240,000 (would actually be less if principle had been paid off in the 5 years!).

In this case the new buyer would either have to come up with $143,000 as a down payment (the difference between the new value of $383,000 and the loan value of $240,000) or the whole building would need to refianced for a higher loan amount. The latter is a costly proposition for everyone involved, especially if interest rates are higher than they were on the original loan. Additionlly there would be appraisal fees, points, title insurance fees, etc. adding to the cost of selling an individual interest. There could also be problems with assumability of the first loan.

The alternative is to have the seller agree to carry secondary financing, however, the buyer may not want to do this because they cannot easily refinance to pay off a balloon payment. So as you can see there are problems with selling a TIC interest.

Recently some banks have been willing to do individual financing on TIC's interests, but those loans are more expensive-- higher interest rates and higher loan to value ratios. Regardless, these should help make TICs more saleable in the future.

- Janis Stone

posted by SFResidence.com @ 7:42 AM