January 14, 2014
A Density Carrot And TIC Stick In San Francisco
Supervisor Scott Wiener is preparing to introduce legislation which would allow developers in San Francisco to increase the density of a building in exchange for designating 20 percent of a development's units as "affordable" as opposed to the 12 percent as currently required by law.
While Wiener's legislation would not change existing height or bulk restrictions for a building, it would allow for a greater number of smaller units to be built within a development's envelope.
As Wiener prepares to propose a carrot, Supervisor Eric Mar is expected to introduce a stick in the form of legislation which would require Planning Department approval in order to establish a new tenancy-in-common (TIC). An attempt to regulate an ownership structure versus property use is tailor made for a legal fight and likely defeat.
First Published: January 14, 2014 8:00 AM
Comments from "Plugged In" Readers
My good friends own a TIC, which has given me the opportunity to study the TIC legal structure, and it really has become quite solid. Given a bit of time it will be accepted by banks as the equivalent of a condo.
Politicians see this happening and try to block TIC's; property owners will then just create a new structure to protect their rights. You can't keep a good man down.
Posted by: unwarrantedinlaw at January 14, 2014 8:46 AM
What does this even mean? Increasing density but not increasing height or bulk? Cramming more units into the same size building, decreasing the size of both the market rate and BMR units?
Posted by: sf at January 14, 2014 8:58 AM
A new idea thrown to mitigate SF's healthy RE market? It must be Tuesday.
We used to have these proposals for new legislation every few months. Then every few weeks. Then every week.
The supes are trying to one-up each other but in the end they look more like chicken running around with their heads cut off. It would provide for passable entertainment but for the damage they create in their path, including the people they claim to defend.
Posted by: lol at January 14, 2014 9:16 AM
Not make sense! Most of the zoning (Eastern Neighborhoods) is form based, so therefore no density restrictions, only height and bulk restrictions. Only way to facilitate more units is increase height or bulk? Or maybe decrease rear yard requirement...
Posted by: Homes R' Us at January 14, 2014 9:24 AM
I second unwarrantedinlaw's statement. TICs are becoming the new condos. 25% down requirements make it very safe for the banks because they'll likely get solid and responsible borrowers.
Posted by: lol at January 14, 2014 9:24 AM
the supervisors are the biggest idiots in the world and need to take Economics 101. Study supply and demand. The only way to decrease prices is to increase supply or decrease demand. The demand will not decrease and you can't control that. All you can control is the supply. Best way is to increase # of units through adding vertical density!!!
SF residents have a choice: don't increase # of units and density and become a larger version of Carmel. Increase # of units and density and become a city, where a variety of incomes can live and work.
Posted by: PricedoutofSF at January 14, 2014 9:29 AM
"Given a bit of time it will be accepted by banks as the equivalent of a condo."
TICs have their place, but this won't happen for two reasons.
First, the unusual ownership structure makes it harder to access wholsale funding and bundle TIC loans with other conforming product. The loan market is national and TICs are not common nationally.
Second, If you foreclose on a TIC, what do you get? You don't have title to a unit as you would a condo, you just get to assume someone else's position in a bespoke ownership agreement among private parties. In a multi-unit TIC, this is probably a minority ownership position and you just foreclosed on one of their negibors so the other owners probably aren't that happy with you.
Obviously TIC loans happen in spite of the above, but there are good reasons why condo loans are and will be far easier to get.
Posted by: anon at January 14, 2014 9:51 AM
^anon, all very valid points. But the fact that banks will impose very strict financing conditions (no fixed rate, high downpayment) makes it an almost risk-free environment for banks.
SF lost 20 to 25% in most of the zip codes in the last downturn. This means few if any TIC owners were ever upside down because of the funding requirements.
Yes, banks will not be able to resell the mortgage as MBSs, but the quality of mortgages makes up for it.
Posted by: lol at January 14, 2014 10:30 AM
PricedoutofSF: I actually think the Supervisors are geniuses and I think they understand supply and demand perfectly. Although you see the only way to make housing more affordable is to increase supply, the Supervisors are trying to decrease demand by making San Francisco a less desirable place to live. Why else would they be proposing inane laws about sugary soft drinks while doing nothing to fix our homeless problem or to fix MUNI?
Posted by: g at January 14, 2014 10:30 AM
Tenancy in Common is a form of ownership that dates back to old England. SF cannot legally usurp State property law.
Posted by: theHitman at January 14, 2014 10:38 AM
Mar is smoking crack. Bored of Stups tried "regulating" TIC formation years ago, only to get bitch slapped by the constitution! You can't restrict property ownership. Just like I can buy a bicycle with a friend and share it, I can buy a SFH with a buddy and share it, I can buy a 3 unit bldg with two others and share it as well. This is basic stuff. But it will make some political marketing waves, as Mar is not perceived as "vocal" these days as that other idiot, Sup Crapos. Business as usual.
Posted by: poor.ass.millionaire at January 14, 2014 10:41 AM
anon- local banks make loans they keep on the books all the time. Tic loans have proven very safe. No reason they will not be available in the future. Hell, even during the worse banking crisis in generations, there were some options for fractional tic owners who wanted to sell. And now? More banks are offering fractional.
Tics will mostly be a local SF thing, but so what? In SF their perception and value will never match condos, but it will get close enough that they are similar alternatives. It's already been happening since ~2005, and that includes the banking fiasco. TIC is the new condo! (Relative to SFH.)
Posted by: poor.ass.millionaire at January 14, 2014 10:50 AM
Increasing density but not increasing height or bulk means something like instead of building one 2000 ft 4 bedroom unit, build two 1000 ft 2 bedroom units.
Posted by: Wai Yip Tung at January 14, 2014 11:25 AM
p.a.m. - A few banks choosing to make these loans isn't anywhere close to the liquidity of the conforming federally backed mortgage market.
I'm not saying TIC loans will disappear, just that they are not and will not be on the same plane as condo loans.
Also, generally there is an adverse selection issue with higher rate loan products where people who accept higher rate terms are worse risks than those who accept normal rates. All things being equal, TIC loans are probably riskier than condo loans. The fact that, as lol mentioned, banks impose very strict financing conditions to offset this risk should make this fact clear.
Posted by: anon at January 14, 2014 11:35 AM
Yes banks make loans they keep on their books but they generally do not like making 30 year fixed rate loans and keeping those on their books, particularly when rates are low, but even when rates are high the standard mortgage is not a big keeper at banks because they just get refi'd when rates fall. So banks basically have to bear all the interest rate risk on long fixed rate loans. So that is why they prefer to sell those types of loans to get that risk off their books.
So if they are going to keep TIC loans on their books expect them to be ARM's, have ballon payments, etc that keep the bank from being stuck with a low interest rate loan for 20+ years.
Posted by: Rillion at January 14, 2014 11:41 AM
I think Scott Wiener gets it all fine and is a smart guy. He is working within the confides of the process and populous we have. I'd like to see density bonuses and a streamlined process for housing types we want but this is a small step in the right direction. I'd vote for him again if I was sticking around in SF.
Eric Marr is a moron and a represents the past failures
Posted by: zig at January 14, 2014 12:07 PM
anon, you are making a lot of assumptions on TIC purchasers. What someone at Sterling told me 2 years ago was that they had very little default and were getting actually very good quality clients.
Yes rates a bit higher. What you see as a sign of low quality is already factored in resale prices of TICs already. Which means that the risk is actually pretty low due to the high cash requirement needed compared to condos.
No wonder more banks are joining the TIC party these past 2 years.
Posted by: lol at January 14, 2014 12:25 PM
There's a spread between the price of a TIC and a condo obviously, and my friends found that it was about 200k for the type of 2 bedroom they were looking at. The 200k savings meant they could buy the kind of place they wanted, it put them in the range to buy the place.
I think the 200k spread is narrowing as the market is figuring out that TIC's and condos are quite similar, and maybe the spread won't go to zero, but it will give my friends a little extra zing in their investment. Can be a great idea to buy something at reduced price with a perceived defect, and then working and studying to reduce that defect or make it go away.
With Ellis, developers have figured this out: there's not that much difference. City won't let developers make condos, so they evict tenants and make TIC's instead, infuriating our ruling class.
Posted by: unwarrantedinlaw at January 14, 2014 12:38 PM
"What someone at Sterling told me 2 years ago was that they had very little default and were getting actually very good quality clients."
Compared to what though? All loans including the NINJA loans of that era? The relevant comparison is to condo loans that had the same high down payment strict underwriting conditions.
Threre probably isn't enough data to prove anything one way or another. But the banks behavior makes it pretty clear that they percieve TIC loans as riskier.
Think of it this way. If it was your own money and someone came to you and had a risk reducing factor, such as high savings and a high stable income, would you increase or decrease the down payment requirement? What if they had a risk increasing factor?
It should be pretty clear that for someone with a risk reducing factor you'd lower the DP and/or other factors while for a risk increasing factor you'd increase the DP or other factors in order to keep your overall risk stable.
And this is exactly what you see with banks requiring increased down payment and extra scrutiny to offset the increased risk of TIC status.
Posted by: anon at January 14, 2014 1:08 PM
"p.a.m. - A few banks choosing to make these loans isn't anywhere close to the liquidity of the conforming federally backed mortgage market."
It doesn't matter. You're comparing apples to oranges. Tics are a tiny, local market. Condos are national. Since it's a small market, banks don't need to sell tic loans. They keep them on their books, just like many local commercial lenders do. Matter of fact, tic loans are structured like commercial loans; normally 3-5-7 years fixed, then floating.
Rillion- 30 year fixed loans are a product of our generous federal gov. No bank in its right mind would keep a loan for 30 years on their books, much less at 3-4% interest. It's one of the perks for 2-4 unit investors like me, especially with these low rates. Any decent bldg you can lock a low mortgage on will become a little money printing machine a few years from now.
Posted by: poor.ass.millionaire at January 14, 2014 1:41 PM
"Second, If you foreclose on a TIC, what do you get? You don't have title to a unit as you would a condo, you just get to assume someone else's position in a bespoke ownership agreement among private parties. In a multi-unit TIC, this is probably a minority ownership position and you just foreclosed on one of their negibors so the other owners probably aren't that happy with you."
This is true if the foreclosing party is the bank that made a fractional loan. But it is not true if the foreclosing party is someone else, such as a judgment creditor who obtained a civil court judgment against the TIC owner. In that case, the creditor can force a sale of the entire building to pay off the debt. It is true that the other TIC owners can then go after their TIC partner who owed the debt, but what a pain.
TICs carry a lot of risks, and fractional lending does not cure them all. There is a reason banks demand far higher down payments and higher interest to lend to a TIC owner. (Also, pre-1978 TICs are subject to rent control, whereas NO condo is subject to rent control, with very rare exceptions).
Posted by: anon at January 14, 2014 1:42 PM
FYI 2 years ago places us in 2012. The NINJA mortgages had disappeared a long time before that.
Sterling applies higher rates not because of a higher risk factor but because of scale and overhead.
1 - When you pool 5B in a MBS that you sell right away (and that ends up quickly on FNM or FRE's books, it's not the same as having a few Ms of mortgages that you have to back with actual deposits. They offer (or used to offer) very competitive CDs, usually 25 to 40 basis points over what the bigger guys were offering on 5 year CDs. Not so much so today though.
2 - A TIC financing deal is more complex and requires more manpower than a regular mortgage. The big banks have pooled resources for processing, whether Sterling still has their own employees doing the work.
Posted by: lol at January 14, 2014 1:43 PM
I see Sterling bank offering rates around 4.25% for 5/1 ARM fractional TIC loans with 20% down and 1 point upfront. Even at those rates, which are low, I could sell my two rentals as TICs, seller-finance the entire transaction, recoup my entire downpayment, and collect a profit of $4200/mo starting on day 1. All while disposing of my renters and associated liabilities and maintenance.
And the profit will increase every year until year 15, when the underlying note is paid off and my take increases to about $6000/mo for the remaining 15 years assuming no change in the underlying index.
That's just about as close to printing money as I think I will ever get. Maybe I'll get started on it tomorrow.
Posted by: Jimmy the House Flipper at January 14, 2014 3:01 PM
Have there been ANY TIC residential sales outside of SF, that are not vacation fractionals??
Good luck selling tics on the peninsula. I think you'll have to seller finance to make it happen. But go for it jimmy! Break the mold!
P.s. Negs of your proposal: no equity upside and much of your cash is tied up 15 yrs. meh, I'll pass.
Posted by: poor.ass.millionaire at January 14, 2014 4:16 PM
@Jimmy - that sounds like much lower returns than are available many other places, including boring old S&P 500 index funds.
But, but, I know that you only view property as an asset, as you made clear in other threads. Liquid investments? Cash? Bah! Those are for chumps! Banks scoff at all but land, I tell you! Land!
Posted by: anon at January 14, 2014 4:30 PM
None of my cash is tied up for 15 years... that's the point of collecting the buyers' downpayments. Indexing the note to the 10-year Treasury, for example, provides some inflation protection.
Don't forget the stupendous tax bill I would receive if I simply sold the place outright. My CPA told me it's something like 56.7% on income over $450k. Ow.
Posted by: Jimmy the House Flipper at January 14, 2014 4:46 PM
Well, you know, I'm thinking outside the box here. Peninsula TICs? Why not!
Like those early settlers, some found the promised land of milk and honey, and others ended up buried under 20 feet of snow eating a Fricasee of human tenderloin in January.
Posted by: Jimmy the House Flipper at January 14, 2014 4:53 PM