TIC Ownership Percentages - How Are They Determined?
TIC ownership percentages are the percentages shown on the recorded deed of the property, TIC owners can define ownership percentages in any number of ways. These include:
- Equal Share - Each owner owns an equal percentage of the property regardless of the size of each owner’s living space.
- Perceived Value – Percentages are allocated based on the mutually agreed upon value of each owners living space. For example, a 3 unit building may have one unit with the least square footage but which contains an amazing view of the city. The other units are larger in size but have no view. The owners may allocate percentage ownership based on the additional value the view adds to the smaller unit.
- Size – The owners may note the exact square footage of each unit and allocate ownership percentages exclusively based on this. Common areas would be allocated equally.
Uses of Ownership Percentages
Ownership percentages are sometimes used as a means to allocate group expenses. This is of course at the discretion of the owners. Homeowners insurance, common area maintenance, and large expenditures (furnace, roof, siding, foundation) are expenses that are often allocated by ownership percentages.
Resale Price, Property Taxes, and Valuation
The value of a given unit of a TIC is not solely dependent on the overall value of the entire property. For example, one unit may be owned by someone who makes significant improvements to the unit while another may be just the opposite. The value of the entire property is derived, not by ownership percentages, but by the sum value of each of the units plus common areas.
The resale price of a TIC share is not determined by taking the market value of the entire property divided by the shares. The resale price is based on the buyer/sellers valuation of a TIC owners specific shares and the rights they hold within a TIC agreement. In other words, improvements or non-improvements a given TIC owner makes to their property are reflected in the value of their shares, not allocated according to the ownership percentages on the property deed.
Property taxes should also be discussed in terms of ownership percentage allocation. Property taxes are based on the property value assessment done by the city. This assessment is done at initial purchase of the property as well as any time a change is made to the property that merits recording by the city. Some TIC owners choose to allocate property taxes by ownership percentage. This is generally not advisable. The reason can be illustrated in the following example.
Say a TIC has three co-owners who each own three equal units and who each are allocated 33.33% of the collective ownership. Owner A decides to completely remodel her unit. She invests hundreds of thousands of dollars in a new kitchen, new baths, new flooring, windows, the whole bit. She even tears down a wall and expands her unit to contain a covered deck. The other owners make no improvements. The addition of the deck to the property will require permits which will result in a reassessment of the property value. After all, the property’s value has changed! So at this stage, the property tax basis for the entire building will change as taxes will be based on the value of all three units, including the improvements made to the one unit by Owner A.
If the three owners had divided property taxes equally by ownership percentages, owners B&C would now have a higher property tax burden even though the building only changed its assessed value because of the actions of Owner A. What should happen is that any increase in property tax should be allocated in whole to the owner(s) who –through whatever action be it renovation, addition, or resale- initiated the value reassessment.
Allocating property taxes this way is not the law and it purely at the discretion of the owners. However, as property taxes are substantial in San Francisco, it is advisable to think through the ramifications of any property tax allocation done by alternative means.