S.F. may clarify TIC units’ tax liabilities

By Kathleen Pender
SF Gate

One of the hassles that come with owning a unit in a building with other people as tenants in common is figuring out who pays what share of the property tax.

In San Francisco, TICs are popular with first-time home buyers because they are usually cheaper than condominium units.

But unlike a condominium, a TIC is not legally divided into separate units. TIC owners receive one property tax bill for the entire building. Although the owners typically agree to pay their share of the tax based on the price they paid for their unit, each owner is legally obligated for the whole bill. If one defaults on his share, the others have to pay it.

Over time, as units change hands and owners improve their units, each owner’s percentage of the tax bill changes. Unless there’s an accountant in the house, keeping track of who owes what can get complicated and cause strife.

To simplify record keeping, San Francisco Assessor Phil Ting is planning to prepare – for TIC owners who request it – separate assessments for individual units. Separate assessments will not change the fact that each owner is still responsible for the whole building’s property tax.

“It makes it more customer friendly. It doesn’t change the legal liability,” Ting says.

Radhi Ahern, a realtor with the TIC Group, says separate assessments will “help make TICs more like condos.”

Ting plans to start getting the word out soon through Realtors and TIC associations.

In July, when his office sends all property owners in the city a notice of assessed value for 2008-09, “we will send, to every TIC owner we know of,” a letter explaining separate assessments and how to request one, he says.

TIC owners would have until late March to request a separate assessment for fiscal year 2009-2010 and beyond.

Ting needs the cooperation of the San Francisco Office of the Treasurer and Tax Collector, which sends out property tax bills.

“We are looking at how we can provide split bills to TIC owners,” says David Augustine, a spokesman for the treasurer’s office. “It’s going to require modification of our computer systems. It will involve some cost,” which could be paid for by property owners who request a split bill.

“Our main concern is that taxpayers will be misled by a split bill and assume that payment of their share satisfies their legal obligation. That’s something we want to be clear about. TIC owners are jointly and severally liable for payment of property taxes” on the entire building, Augustine says.

Figuring the TIC tax

Ting plans to use the same approach that most TIC groups use to divvy up property taxes.

When a TIC is new, each owner pays a percentage equal to his or her purchase price divided by the prices paid by all owners combined. When one unit is sold, the new owner becomes responsible for whatever increase in property taxes arise. Lyssa Paul, an attorney with Sirkin Paul Associates, gives an example:

Suppose there are four units and each sells for $500,000. Each owner pays one-fourth of the property tax bill. Two years later, one unit is sold for $750,000.

As a result of the sale, the building’s assessment goes up by $250,000. The original three owners now pay 22.2 percent of the bill ($500,000 divided by $2.25 million) and the new owner pays 33.3 percent ($750,000 divided by $2.25 million).

Likewise, if one owner makes a renovation that triggers a reassessment, that owner bears the burden of the tax increase.

There still could be disagreements if the assessor comes up with a different pro-rata share than the homeowners had in mind. In the end, how they allocate taxes will depend on what the owners said in their TIC agreement, Paul says.

There could be legal hurdles for buildings with more than four units. A state law allows owners to request separate valuations on a property with more than one owner, but adds, “A separate valuation shall not be made dividing any piece of property … into more than four parcels.” This limit could be waived by a majority of the county’s board of supervisors.

TICs exploding

The number of TICs in San Francisco has been swelling, mainly because the city strictly limits the number of buildings that can be converted into condos.

In 2007, TIC units accounted for 13.4 percent of all dwellings sold in San Francisco , up from 1.8 percent in 2001, according to John Lee, a broker with Pacific Union.

Tenancy in common “is really a substandard form of ownership, especially for first-time buyers,” says Gordon Friedman, a loan broker with Guarantee Mortgage. “They buy property with loans and issues that only seasoned professionals should be dealing with.”

In years past, TIC owners had to get one group loan on their property, with each owner responsible for repaying the entire mortgage. Many banks now offer loans on individual TIC units, which makes them more like condos. Some TICs, for various reasons, still opt for group mortgages.

Separate property tax bills is a step in the same direction.

“When you combine that with fractional loans, a TIC is not as good as a condo, but it’s pretty close,” Friedman says.

That irritates Ted Gullickson, director of the San Francisco Tenants Union. “If we’re going to make (TICs) more like condos, let’s really make them like condos and make them subject to condo-conversion law,” he says.

If TICs get the benefits of condominiums, they should also get “the bad parts, like having to bring their buildings up to code, meet off-street parking requirements and provide tenant protections,” he says.

TICs are also popular in cities such as Oakland and Berkeley . But Russ Hall, Alameda County ‘s deputy assessor, says his office “hasn’t given a thought” to separate assessments.

“We are always looking for good ideas to help the public with their assessment issues,” he says. “If it’s a good idea, we certainly would consider it.”

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