Sunday, October 22, 2006

Happy Coincidences

The weather has been so glorious it would have been sinful to spend the weekend brooding over real estate. So this morning I went horseback riding with my downstairs neighbor. It turns out there is a small stable called Miralomar in Daly City where you can take horses down to the beach. I had a great surfside stroll with some trotting on a lovely mare named Harriet. Also discovered, after five years of living in the same building, that my TIC partner is also a horse lover, and I am sure we will do it again. So today on this warm starry evening I am going to send out a wish. I hope everyone who enters into a TIC partnership will also enjoy this kind of happy coincidence with a fellow member of their group.

Saturday, October 14, 2006

360 Lily

If parking is not a must have, and you prefer a central city location, this appears to be a very nice new TIC property. Unlike some listings that claim to be in Hayes Valley, this one certainly is. Lily is a cute little alley street, which means you are close to the freeway but spared some of the traffic noise common on Haight, Page, Oak and Fell since the opening of the Octavia Boulevard access. Two of the five units are attractively priced at $349,000 and $369,000. It's open tomorrow, from 2 to 4pm. Worth checking out.

Property Tax Primer: Supplemental Tax Bills

Part 2 of 3

If you have followed along so far, you have read that in San Francisco the assessed value of your home is the cash or market value at the time of purchase, and your property tax calculation is based on that assessment.

California State law requires "the reassessment of secured property as of the first day of the month following an ownership change." That means the first day of the month after you close on your TIC your property tax starts accruing based on your purchase price. This results in what the City calls a Supplemental Property Tax Bill.

For example, let's say the former owner purchased your 4-unit building 20 years ago for $100,000. In year 20 he decides to sell off the units as TICs. On September 15 the new TIC partners close the sale on each of the units, paying $500,000 each. As of October 1, the City starts clocking the property tax (in 2004-2005 the rate was 1.144%) on the additional $1,900,00.

However, it often takes the city some time to catch up with the billing that corresponds with the new assessment. The SF Tax Collecter's website notes, "A new property owner may receive one or two (sometimes three) supplemental tax bills depending on the date of purchase."

That means the first six months to a year you might receive bills based on the previous owner's much lower assessed value. And then suddenly, wham, you are going to receive bills for some or all of those back taxes. Based on our example, 1.144% of $1,900,000 is $27,360. If all the parters hold an equal 25% interest in that theoretical TIC, they could each be responsible for as much as $6,840 in Supplemental Tax.

When forming a new TIC each owner should calculate this into his or her individual startup costs. Make sure that after writing the checks for your down payment and closing fees you have enough set aside for the first year's property tax. The group would ideally fund the house account with those monies shortly after closing, even though the Supplemental Tax bills will likely not arrive until much later.

If you are buying into an existing TIC group, the same principle holds true, except as the new buyer only you will be held responsible for the Supplemental Tax. Sticking with our 4-unit example, let's say four owners paid $200,000 for their units ten years ago. In year ten, you purchase a unit for $500,00 from one owner. The City will view that transaction as adding $300,000 to the building's value. You alone will be expected to pay any Supplemental Tax bills for that additional $300,000 in assessed value.

Friday, October 13, 2006

Angry Tenants

Read this Letter to the Editor in The Examiner today:
Angry tenants have called me to let me know I’m one of those “greedy landlords” because I’m against rent control. My response to them: “I’ll rent to you. Here, sign this lifetime lease, and if you break the lease, you will have to pay for the remaining term on the lease (the rest of your life).” They say I’m being ridiculous, but I suggest that is exactly what landlords are being made to do: sign a contract that potentially will last the tenant’s lifetime with no ability to get out of it. And the tenants wonder why units are being held off the market and their buildings are being Ellis Acted? And why would a landlord want to turn his building into a TIC or a condo? Self-explanatory.

I was a renter for several years before I purchased my TIC. Perhaps because I had lived in a different part of the country before moving to San Francisco it never dawned on me that my rental lease entitled me to anything other than a temporary home for hire.

I had the opportunity recently to speak to an angry tenant. I asked him why he thought he merited rent control and the other guarantees tenants receive in San Francisco. He said "without people like me - the queers, the crazies, the wild and unkempt we will lose the character of the city, a place where people can come and live their dreams." He added, "And we don't have access to capital like rich owners."

What an appalling statement. And how disparaging, particularly to our gay community, most of whom would probably not want to be lumped in with the crazy and unkempt. I am glad I never got trapped in the incredibly self-defeating illogic of tenant entitlement. Otherwise I would not have worked and saved and adjusted my expectations and bought into an old "needs work" TIC. For those in the market hoping to own a home - including the artists and eccentrics - I say don't listen to the angry tenants. Work. Save. You can do it.

Tuesday, October 10, 2006

Marriage or Remarriage of Party

I'm getting married. Woo hoo!

I should be out in Napa lasciviously stomping grapes, or at the Starlight Room dancing cheek-to-cheek, or in a bathtub full of bubbles pouring over travel brochures about Tahiti...

But no. I am home drinking sake raking through my TIC agreement.

"15.6 Marriage or Remarriage of Party
In the event a Party marries, re-marries or becomes a domestic partner while this Agreement remains in effect, that Party shall immediately cause his/her new spouse or domestic partner to execute a recordable quitclaim deed in favor of the Party as his/her sole and separate property."

That means as soon at we are joined in matrimony beneath the gold dome of City Hall I must march my new husband over to the Recorder's Office so he can file a paper stating he has no financial interest in the home we will be sharing together.

My first thought is... does this ridiculous legal document govern every damn aspect of my existence?

My second thought is... part of the joy of marriage is heaping all your belongings on the same little wagon and pulling them along together. Is the lawyer who wrote this agreement seven years ago going to tell me that can't be done?

My third thought is... it's the spirit of the law, not the letter. There must be some way to make this arrangement fairer to my future spouse. He is going to be paying half the mortgage, after all.

I realize some unsavory precedent must have instigated this cynical clause. Some situation where a TIC partner married a destitute werewolf and disrupted the peaceful co-existence and financial stability of the sacred circle of owners. But this isn't that kind of situation. We are both upstanding middle-aged citizens. And my fiance is, actually, better off than I am.

What a thing to tell your beloved. Sorry, darling, you're out - my building partners take precedence.

This requires further investigation. And research. And possible consultation with the Juris Doctor author of the offending clause. Stay tuned.

Property Tax Primer: Proposition 13

Part 1 of 3

They say you cannot avoid death or taxes, but if you have been a renter you have indeed skirted the obligation of paying the local tax collector. First time TIC home owners may want to brush up on a few items relating to this topic, such as Proposition 13, Supplemental Tax Bills, and San Francisco's property tax exemption.

Proposition 13, the "People's Initiative to Limit Property Taxation," was a ballot initiative passed in 1978 by California voters. Because of this amendment to the state constitution, residential property tax is limited to 1% of its assessed value, until the property is resold. In addition, once you purchase a property, its assessed value may only be increased by a maximum of 2% per year. (There are exceptions. For example, if you make substantial additions or renovations this 2% cap no longer holds true.)

In comparison, let's consider property taxes in New Jersey. My parents purchased a home there 30 years ago. They paid off the $50,000 mortgage and are happily approaching retirement. They have long imagined living out their golden years in their home town, near the friends and family they have enjoyed being close to for decades. The three bedroom split level was assessed at $250,000 some years back, which equaled $8,000 a year in property tax, a cost they could manage on a fixed income. Suddenly, in 2004, comes the real estate boom. Their relatively modest home was reassessed to be worth $500,000, and the town reset tax rates accordingly. They simply cannot afford to pay, so their only option is to sell. This has become an unfortunate fact of life in the Garden State.

In California, thanks to Prop 13, if you buy a home you are protected from an unexpected and gigantic property tax increase. And if you have children, they can inherit the capped taxes with the family house. Whenever I get annoyed by a particularly wacky ballot prop, I remember that without this populist mechanism we would not have Prop 13.

Even if you are not nearing retirement, it is important to consider the effects of Prop 13 on your home purchase.

In San Francisco, the assessed value of your home is the cash or market value at the time of purchase. This is something to keep in mind when negotiating your purchase price. Both buyers' and sellers' realtors prefer to keep the recorded sale price as high as possible. This allows the realtors to maximize their commission, gives the seller's agent more to crow about to prospective clients and protects against a downward trend in future comparables.

For example, when I purchased my TIC several years ago my realtor advised me to request a $15,000 seller rebate at closing, because of work that needed to be done on my unit. The seller agreed. My recorded sale price remained the same, but at closing I was credited $15,000. However, it would have been more advantageous for me to have asked for a $15,000 price reduction. The seller would not have cared one way or the other, and my assessed value would have been lowered by $15,000. As a result I would have paid about $150 less each year in taxes, and any future reappraisals would have been based on the lower value.

For more details on the history of Prop 13 and current issues related to property tax activism check out the Howard Jarvis Taxpayers Association.

Tuesday, October 03, 2006

Herding Cats

One of the advantages of being in a TIC is that applying several perspectives to an issue or problem usually results in a more thoughtful and creative solution.

One of the disadvantages of being in a TIC is that trying to mobilize everyone in a group of equal partners to proceed quickly and effectively toward any particular goal (agreeing on a roofing contractor, deciding on a refinance) can be somwhat difficult.

On balance, I would say the first outweighs the second. Especially since even if it takes some time and effort to get everyone on the same page, I'm not paying for that new roof all by myself.

Square Footage Not Available

We all know charming = teeny. How teeny? The MLS reports square footage not available, so in this case you will have to go and see for yourself. (I guess with all the lawsuits going on regarding buyers being misled about square footage realtors aren't willing to take out a tape measure and do a few calculations.)

That said, I love this listing.

As far as I am concerned, when it comes to owning property less is more. If it takes only an hour a week to clean from end to end, pets can sprawl langourously in the garden sun, and the place has history, poetry, seclusion, a solid foundation and bougainvillea I am ready to move in.

But even for all that romance, I wouldn't pay $500,000 for 300 square feet and a patio (the average size of an "earthquake-era cottage"). Part of the less is less philosophy is that humble abodes are accompanied by frugal mortgages. My guess is that most buyers will agree and when it comes to the asking price of 472-A Clipper more will soon be less.

(FYI the realtors' claim that this property is "ready to enter condo lottery for first time this year" has no significance. Given the current state of the lottery, this quaint little relic from 1903 is probably not going to condo convert anytime before the turn of the next century.)

E-LOAN Gears Up For Fractionals

Apparently E-LOAN is still actively pursuing a fractional TIC offering.

One of my building partners just received this notice via email:
E-LOAN is happy to inform you that we have made significant progress on this exciting new program. In order to further tailor the TIC program to our customers' needs, we would greatly appreciate your feedback. To participate in our brief survey, please click here.

If you are a TIC owner interested in seeing more fractional loan offerings go ahead and fill it out.

And no, I don't work for E-LOAN, or get any kickbacks for driving clicks.