ICT offers, an affordable alternative to condos, are increasingly popular

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Split loans for ICT are only offered by a few banks.

It’s no secret that residential real estate is expensive in Los Angeles, where rental rates in prime areas have skyrocketed and the cost of homeownership continues to rise.

From May 2019 to May 2020, home prices in the Los Angeles market rose 4.4%, according to data from CoreLogic. Rent, meanwhile, has gone up 65% over the past decade, according to a study by the RentCafe ad service.

This costly reality has led some buyers to take innovative pathways to home ownership, including a vehicle known as leasing, or TIC.

ICT is a form of co-ownership. While the concept isn’t new – experts say it started to gain traction here about three years ago – its popularity is on the rise.

“The market is growing very rapidly,” said Christopher Stanley, ICT developer and vendor at Vanguard Properties. He is currently working on a few joint tenancy agreements around LA

The number of properties available for conversion to shared rental, the availability of new financing options and prices that may be lower than condos all favor the use of ICT.

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Unlike a condo where a buyer owns their individual unit, under an TIC, an individual owns a share of the larger property with exclusive use rights to a specific unit.

These buildings are often older properties that were once rental housing. The conversion of these buildings to ICT has sparked some anger from tenant rights groups amid a shortage of affordable housing. Some buildings that are now TICs were previously rent-controlled properties.

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Proponents of homeownership, however, argue that joint rentals, which are priced lower than other residential real estate deals, allow people to buy a home and build equity.

The Business Journal spoke with ICT experts to help better understand this relatively new form of ownership.

Why are we hearing more about ICT in residential real estate now?

ICTs have been popular in San Francisco for a long time, experts say, but only recently gained popularity in the Los Angeles market.

A young San Francisco lawyer named Andy Sirkin pioneered the concept of joint tenancy in the 1980s, according to Elizabeth McDonald, founder of Highland Park-based brokerage firm The Rental Girl, which works with landlords to convert ICT housing.

Initially, Sirkin entered into an TIC with friends so that he could afford real estate in the notoriously expensive bay area.

McDonald said Sirkin’s model has become extremely popular, and more and more people are quickly asking him to draft joint tenancy agreements.

“It was an idea that sort of grew out of a lack of inventory and affordability. It was an idea of ​​cost to the consumer, a consumer product, ”said McDonald.

One of the main reasons that ICTs have become more popular in Los Angeles, besides the fact that their funding is now easier to find, is their cost.

“You can really split ownership. That’s the beauty of it all. It breaks up the property, so it becomes more affordable, ”said McDonald, adding that the purchase price of ICT was typically 10-20% lower than comparable condos.

Stanley of Vanguard Properties said in his experience ICTs are up to 15% cheaper than condos because “you don’t get a deed for your unit – you get a percentage for the building” .

He added that many ICT buyers are first-time owners looking to trade within 10 years. A shared apartment is a way for them to become owners in the meantime.

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ICTs, experts say, are also growing due to the ease of converting apartment buildings into ICTs.

For a developer, ICT does not come with extensive regulations and requirements, including a large number of parking spaces, unlike condos.

Eric Sussman, an assistant professor of accounting and real estate at UCLA who has worked on a joint tenancy in the past, said the eligibility process and parking requirements “can really limit” condo conversions.

McDonald added that for some small rental properties, mom and pop landlords can’t always keep up with their properties, or the kids inherit the properties and don’t want to deal with tenants. These buildings are prime candidates for ICT conversion.

“It’s a great way to sell a unit that you couldn’t make a condo,” Stanley said. “ICTs are usually older rental buildings that can’t really be converted, but they’re nice buildings,” he added. “These are things that in most cities you can convert into condos, and they sell like hot cakes. There is a demand for this kind of houses.

Stanley said the pool rental market has grown in Los Angeles, but “it will never be giant.”

How are ICTs financed?

When ICT started to gain popularity, buyers had to take out a group loan together. If one person failed, so did everyone. And if a person wanted to sell, they needed authorization to sell their loan.

Eventually, banks began to offer split loans, so that people interested in ICTs could finance their part of the purchase separately.

Today, only Sterling Bank & Trust, which has an office in Koreatown, and the Virginia-based National Cooperative Bank, offer these Los Angeles joint lease loans, the brokers said.

“They were a game-changer for joint tenancy,” Stanley said of Sterling Bank, which began offering split loans 12 years ago in San Francisco.

Sterling Bank manages 95% of ICT loans, according to McDonald’s, who added that the bank’s split offers are the reason the ICT market has really taken off.

“The split loan basically allows each homeowner to get a loan individually, to get a split loan. If another owner of the building did not pay off their mortgage, the lender would only foreclose on that owner, ”she said. “It changed the game for ICT and made common tenants more comparable to condos. “

ICT loans, unlike other mortgages, do not have a secondary market, which means that banks do not sell the loans. As a result, there are no 30-year fixed options. Instead, there is an adjustable rate, brokers say. A larger down payment and a credit score are also usually required.

For example, a TIC with a purchase price of $ 899,000 and a down payment of 20% might have an initial rate of 3.5% which, after an initial fixed period, would rise to 3.5% plus the index.

“The terms of the notes are not as favorable (for borrowers) as the more traditional finance notes,” said Sara Holland, partner at Lewis Brisbois Bisgaard & Smith.

These conditions protect banks that cannot foreclose on a property simply because a person defaults. Stanley said he expects more banks to offer split loans in the future.

Can I rent my property now and sell it later?

The short answer to both questions is yes.

Stanley added, however, that most joint buyers are looking to occupy the property. “You don’t really see investors buying these,” he said.

Stanley added that there can be complications if the property is subject to the Ellis Act, which allows landlords to evict tenants if they opt out of the rental business, but not to rent to new tenants. at a higher price.

When it comes to selling, the lower price than other houses in the area may make ICT attractive, but funding and lack of understanding of ICT can cause problems as it is still a new product.

“As they become a staple, people will be like, ‘Oh I know what it is and I’m getting a discount’ or ‘Oh, I know what it is and I’m not. don’t want to, ”Stanley said. . “Over the years it will be easier to sell them.”

McDonald said that buyers who would not qualify for an ICT loan are not able to purchase the property. Buyers, she added, usually need to put at least 10% down and have great credit. And just because a buyer is approved for a loan to buy a home does not mean they will be approved for an ICT loan. Since so few banks provide ICT loans, McDonald said there may be delays in approval.

Are ICTs Available in Commercial Real Estate?

ICTs are not uncommon in commercial real estate, although many experts consider them to be out of date.

Tom Lagos, executive director of Institutional Property Advisors, said that in the mid-1990s there were only a handful of ICT sponsors, and by the 2000s there were hundreds in Los Angeles.

But it did not last.

“After the financial crisis it exploded and I didn’t see it come back,” Lagos said.

He added that it was becoming difficult for individual owners to come together and make decisions as some people took shortcuts to close deals.

“It really exposed this whole industry to a point where this ICT model just doesn’t work anymore. Where I see it still works is more of a strategy where I know you, and we know each other, and we want to get into a property together, ”Lagos added.

Steve Lurie, real estate partner at Greenberg Glusker Fields Claman & Machtinger, said ICT is not that common in the commercial space, but has sometimes been used in 1,031 exchanges to allow owners to exchange at different properties.

And as with residential properties, ICT financing can be more difficult for commercial sites.

“A shared apartment limits homeowners from a funding standpoint,” said Lurie.

“There is less choice. There are lenders who prefer not to lend to joint tenancies because the agreements do not have the same protections that the lenders want, ”he added.

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