Great Groups, Part 1

Today if you go to a TIC open house one of the first things you might hear is "We've got wonderful partners lined up. Smart people, nice people. It's a going to be a great group!" Keep in mind the selling agents who are promoting the fine qualities of your fellow buyers will soon be gone and in the end it is going to be you and the other new owners alone in your living rooms, poring over spreadsheets and contracters' estimates, trying to figure out the dynamics of your day-to-day relationships and how much to pay for the new roof.

My TIC group came together more by accident than by design, but it actually has turned out to be "a great group." Here are some of the reasons why:

1. We were business partners before we became friends.
(None of us knew each other before entering the TIC. There are no personal alliances encouraging cliques to form or
clouding our judgements about what is best for the building.)

2. We have a diversity of professional expertise among the partners.
(A civil engineer, a lawyer, a graphic designer, a deaf sign language interpreter, a database coordinator and a public health manager.)

3. We all love old historical buildings.
(If you are buying into an old building like our 1910 Edwardian, the love factor helps mitigate the inevitable bother of dealing with contractors and maintenance surprises like pieces of plaster falling off that lovely decorative facade.)

4. We all started out in the same income bracket.
(Because no one owner has significantly more money that the others, no one presses for renovations and upgrades the rest of us cannot afford. We also do not have owners who are retired or living on fixed incomes redlighting repairs the rest of us feel are necessary.)

5. We are all about the same age.
(As boomers we share the same general cultural framework and some of the same concerns that come from being middle-aged.)

6. We are all open and effective communicators.
(We focus on solving problems and listen to all divergent points of view before making a decision.)

7. None of us has any kids.
(There's nothing wrong with kids. But for us it seems to help that there is no opportunity for differing opinions between those that do and those that don't.)

8. None of us has a tendency to blame other people for our own failings, issues, or misfortunes.
(This may have something to do with the fact that at age 40+ we have all learned that the blame game never fixes or changes anything.)

9. We are all comfortable with collaboration.
(No one in our group feels driven to be "the leader.")

10. We always have food and wine (lots of wine) at our meetings.
(After taking care of business our meetings more or less turn into a party.)

I am sure the formulas vary for every successful TIC.

Did You Know Those People?

People who are interested in buying a TIC often ask me if I knew my partners when we first purchased the building. Back in 2000, TICs were considered high risk investments. Most realtors cautioned buyers against them and many brokers would not list them. There were no meet-and-greet TIC partner parties, find-a-partner postings on Craig's List or TIC matchmaking websites.

Our building has six units so it was even stranger and scarier than most. The man who sold it was a mean old realtor who came out of retirement to do a deal no one else wanted to touch. He could care less if we got along, or liked each other, or wanted to share hall cleaning duties. His only goal was to hustle us into signing our contacts so he could be gone with his cash.

In short, my partners and I were thrown together by chance and circumstance, propelled by the realization that if we wanted to own a home in the City this was the only way we were going to be able to do it.

863 Haight

If you are in the market for a TIC, these units are not really in Hayes Valley, but they are centrally located near Buena Vista Park and are very nice. It's a lovely and apparently lovingly restored 5-unit Edwardian building with spacious rooms, good light, stylish modern fixtures and historical charm. I happened to be walking on Haight last Sunday and took a looky loo. (That's a term realtors use for curious neighbors and other people who visit open houses but aren't looking to buy.)
Yes, they have fractional financing. And no, I am not affiliated with Paragon Realtors, Pacific Capital Mortgage, the owner who did the Ellis Act or any other entity who might profit from these observations.
One word of caution - if you fancy a property that has better than a snowball's chance in hell of condo converting, this isn't it.

Condo Conversion: This Page Cannot Be Found

If you are a TIC owner who has participated in the condo conversion lottery, you have heard of the Bureau of Street Use and Land Mapping on Stevenson Street. They are the city department that certifies buildings to purchase their lottery tickets, conducts the lottery and posts the list of 200 winning units and the list of standbys aka losers.

In Kafka-esque fashion, the rules for the lottery are every changing. In 2006 a new system was instituted, close to the time of the drawing. The new system benefited older TICs that had been unsuccessful for many years by putting them into more privileged drawing tiers. These rules were in effect for one year only.

No one knows what will happen in 2007. It's up to the Supervisors and the Mayor. It has been noted by the TIC Coalition that the political climate seems a bit chilly this year. Recent legislation about condo conversion and Ellis evictions, which the mayor declined to veto, could be a sign that more permanent improvements in the condo lottery system will not be on any candidate's agenda this fall. Who knows? Perhaps by February reason will prevail.

Apparently the folks at the Bureau of Street Use and Mapping (who have always been very nice about allowing me to line up my lucky troll dolls on the counter as I purchased my tickets) are just as clueless as the rest of us. Go to their homepage and click on the condo conversion link.

Fractional Financing

My group has begun shopping for fractional financing. Things are improving since these loans came on the market several months ago, but the rates are still surprisingly high - at least a point above the average condo mortgage. Yesterday one broker quoted me 8%! This for a 100% owner occupied building that has been a TIC for nearly seven years, with all owners holding credit scores far above 700.

This evening my partner pointed out the publicized fractional loan rates for the new 18-unit Francisco Palms TIC. They are offering individual loans of up to 75% of the purchase price at a rate of 6.95%, fixed for the first five years, with interest only or amortized options. These are the kind of rates we would like to see for all San Francisco TICs. But unfortunately only the TICS that involve developers with construction loans from the Bank of Marin are getting this kind of deal.

Ellis Act Evictions

Our building went TIC in 2000. The owner took it off the rental market by exercising the Ellis Act, a state law that permits property owners to get out of the landlord business. Because state law trumps local ordinance, property owners in San Francisco can use the Ellis Act to remove tenants and re-sell individual apartments as tenancies-in-common units. Tenancy-in-common is a form of cooperative ownership that gives the owner of each flat a percentage share in the building.

Think about it. If you owned a hundred-year-old six-unit building in San Francisco during a real estate boom, what would you do? You could either retain a roll of under-market rate rents and struggle to keep the place maintained, or you could remove your building from the rental rolls, and sell each unit for a hefty profit. If you opted for the latter, you would walk away with a pile of cash, and could forget about fielding all those complaints about wood rats and leaky pipes.

The only downside would be - you've got to ask some people to find new places to live, and you've got to pay them some compensation for the inconvenience.

I used to live up the street in a sixteen-unit rental building. Like 40% of the renters in San Francisco I dreamed about becoming a homeowner. For two years I canvassed the city trying to find a unit I could afford. I had given up hope until I happened to walk by an open house in my neighborhood where six TIC units were going on the market. No elderly, disabled or ill people had been cast out into the street. The owner of the building simply found it more profitable to sell off the units than to try and remain a landlord in San Francisco. And the members of my group who bought units in the building have all profitted in turn.

Am I OK with the fact that the former owner of my building did an Ellis Act, allowing me to become a home owner in San Francisco? The answer is - yes.


Related links:
SF Rent Board
Owner Occupancy and Ellis Act Evictions
SF Tenants Union