Assumability or Loan Assumption

Loan assumption is the ability of a new borrower to take over a loan -on the same terms- from the original borrower. The new borrower would assume all responsibility for the loan and the original borrower would no longer be under any obligation to the debt. Loan assumption is a clause in mortgage loan contract that may or may not exist. Assumability has pros and cons like anything else. A property owner with an assumable loan can generally garner a higher price when selling as the assumed loan will either have a lower interest rate than a new loan or the Loan to Value (LTV) ratio on the assumed loan will be higher than on a new loan. Either way it will make the property more attractive to a buyer. The flip side is that loans without assumability clauses tend to get slightly better terms as assumability puts the lender at greater risk.

Loan assumption is valuable in TIC financing as co-owners in TIC need to be able to sell their shares in the TIC independently of one another. Without assumability, the TIC loan will need to be refinanced each time a co-owner decides to sell their shares and leave the TIC. Assumability will make TIC shares more valuable and enhance the marketability of a TIC share. The TIC owners as a whole will need to draft specific language in their TIC agreement that defines the criteria by which a potential buyer will be judged before they assume a portion of the TIC loan. This is to ensure that the new owner doesn't bring undue credit risk to the co-owners.