Tuesday, January 16, 2007

The Liquidity Trap

KB and I had dinner on Saturday with two other couples. All are TIC owners. Inevitably the conversation turned to the tribulations of TIC ownership.

One duo lives in a two unit building, and recently bought out their upstairs partners They would like to convert the property, a lovely stick Victorian, back into a single family dwelling. But of course lawyers have advised them not to tangle with the City when it comes to "taking a unit off the market." So even if they do the renovation they will need to complete it on the sly without permits, and leave a side door entrance to the upstairs, leaving the illusion of a separate residence and street number. And when and if they want to sell they will likely have to reconvert the property back to separate units. They are not planning to move anytime soon, but nonetheless any equity they gain in the property is going to be dinged by the expense of renovating and unrenovating. And heaven help them if the City finds out.

The other duo live, like I do, in a six-unit building. They recently needed to refinance their mortgage, like my building will need to do before 2010. This group opted for an assumable group loan instead of fractional finanacing, because fractional financing rates and terms are so onerous. This, of course, puts all the owners in a position where they will be hindered from paying down their notes. If you have a group loan and pay off your portion of the mortgage and then decide to sell you are hogtied when it comes to getting your cash out. Either the entire group has to refinance again - with all the costs that go along with a refi - or you must offer a private mortgage to the new owner.

When you first buy a TIC paying down the mortgage may seem like some far off impossibility. But of course sometimes financial situations do change for the better. There are two owners in my building who have the means to pay off their loans, and only with great trepidation would they do so. Meanwhile, they continue paying an inordinately high financing rate in order to preserver some liquidity in their property. Not the best situation to be in. This liquidity trap is, in my view, the biggest downside of TIC ownership. Until fractional loan rates become more favorable, many TIC owners will remain in the clutches of this liquidity trap.


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