Estimating the TIC discount (part 1)

June 3, 2017 by Shreyas Vijaykumar 3 Comments

434 Laurel Street is a full floor tenancy in common (TIC) in the desirable Presidio Heights neighborhood. And it looks great! But it’s also listed at $1,495,000 which intrigued me because it’s not large (I estimate 1,100 square feet) and the final price should include some sort of TIC discount.

TICs are common throughout San Francisco because they represent a way to convert an apartment building or single family residence into multiple owner units even when city/county housing policies effectively or actually prevent that same outcome by way of formal parcel subdivision. You see this a lot with old Victorians that now have two front doors leading to separate units – it’s likely a TIC and once upon a time that was all one single family home.

While TICs look and feel a lot like condos, they have a few downsides that lead to the TIC discount mentioned above. The main downside is that your ownership is represented as a fractional interest in the entire property rather than a 100% interest in your own unit. As far as the county is concerned, there is still just one deed for the whole property and all the TIC owners are on it – your specific rights and obligations are maintained in your TIC agreement, which is not a recorded document.

All of this means that 1) you will have a harder time financing your purchase and what financing you can find will be more expensive because the underwriting is going to be more bespoke and the loan likely can’t be sold into a government program 2) you are exposed to your co-owners and their ability to meet their financial obligations, certainly more so than in an equivalent condo situation 3) you will be selling these same inconveniences when you look to exit the property.

I don’t know about you but I want a little discount for all that!!

Before we get into the estimate, let’s take a look at the unit:

434 Laurel Street doesn’t list square footage (nor did the marketing material at the open house) and as I noted in a recent post – this is an area where the SF Assessor-Recorder Property Information Map is not going to help much because it doesn’t have information on the individual units within a TIC. We can estimate the square footage though – the Property Information Map says the whole building area is 4,460 square feet and I know that there are 4 units, three are 2b/2ba and one is 3b/3ba. Without getting too complicated it seems reasonable to estimate 1,100 square feet for this unit, which is one of the 2b/2bas.

Referencing a formula I’ve been building up over the last few posts – I am going to give this unit a usable square footage score of 0.9. Like 88 Garden Street, the living area is a little too narrow and the unit would be more desirable if the nook office went away and that square footage could be repurposed for living space. Presidio Heights gets a neighborhood score of 1.3, and because we’re in San Francisco the region score is 1.0 (we use the region score to capture the step up/down relative to San Francisco when looking at other bay area neighborhoods).

Estimated sale price = ($ / square foot) * region score * neighborhood score * square footage * usable square footage score

Estimated sale price = ($1000 / square foot) * 1.0 * 1.3 * 1,100 square feet * 0.9

Estimated sale price = $1,287,000

Two more things to do – I’m going to add a condition premium to capture the quality of the complete remodel, and then I’m going to apply our TIC discount.

On the condition side, I’m going to add a premium of $150,000. That may sound like a lot until you walk around and absorb how many luxury upgrades have been made to every room in the house. $150k (in terms of value to buyers) might even be a little low, but I am pretty sure that on the cost side you could transform an average 2b/2ba to this level with < $100k which should relatively constrain the premium.

Estimated sale price = $1,287,000 + condition premium

Estimated sale price = $1,287,000 + $150,000

Estimated sale price = $1,437,000 (condo value)

I’ve informally heard the TIC discount to be around 15% and I will explore some different ways to get that number in a separate post, but let’s be generous and call it 10%.

Estimated sale price = $1,437,000 * (1 - TIC discount)

Estimated sale price = $1,437,000 * (0.9)

Estimated sale price = $1,293,300 (TIC value)

To summarize – as a condo, I would pay $1,437,000 for this unit, but as as TIC and with the all the corresponding ownership downsides, I would pay $1,293,300.

Now the interesting thing is that this unit will definitely sell for above what I am calling the condo value, because the nearly identical unit upstairs sold for $1.7m last fall. Which means that either 1) there is some divergence between my value function and that of the target buyer and/or 2) some of my factors are off – perhaps the Presidio Heights neighborhood score is really closer to 1.4 and/or maybe the San Francisco 4 unit luxury TIC discount is effectively 0%.

This house is already pending after just the first weekend so we’ll get to see the result and do some of that assessment very soon!