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September 25, 2013

Park Lane Raises Bar for Luxury TIC Market


The luxury TIC trend hits a new high with Park Lane at 1100 Sacramento in Nob Hill. About to become the largest and most high-end TIC project in San Francisco, 1100 Sacramento is positioned to be the mother of luxury TICs.

Tenancies-in-common (TICs) have traditionally been purchased by buyers who couldn’t afford condos, and who would assume the risk of sharing a mortgage and title so they could become home owners, preferably in desirable and popular San Francisco neighborhoods.

But TICs have hit luxury proportions in recent years, thanks to the fractional financing that precludes everyone being on the same mortgage. A total of ten TICs have sold for $2M-$3M since 2011 (four for all cash), and that doesn’t include off-market sales. Having this individual unit financing gave TIC owners their own mortgages, which significantly cut down the risk. Buildings with more than six units couldn’t qualify for condo conversion, anyway, so the idea was to pay cash or take on the fractional loan and accept the fact that you’d always own a TIC.

Park Lane flies in the face of tradition. The building is a 12-story apartment building with 33 units, 17 of which are now vacant. Owner Russell Flynn expects the remaining tenants to either purchase their units, or vacate (with the possibility of an Ellis Act looming). He’s renovating all the units now, and the first release of six units will range in price from $2.6M to just under $7M. Flynn projects a sellout of $100M.

Why would a building selling TICs in this price range—including a 4400-sq foot penthouse for $8M-$10M, depending on whether it’s sold finished—appeal to buyers who could obviously afford a less-risky condo?

Park Lane’s big draws are prestige and location. There’s very little inventory in a classic Nob Hill location such as 1100 Sacramento, which is adjacent to the Fairmont and across from the Pacific Union Club. It’s prime real estate, and there’s really no equivalent. Buyers who want that location won’t be satisfied with SoMa’s Millennium or the St. Regis, even if they are condos. If sharing title with their neighbors is what it takes to get in, they’ll do it.

And let’s face it, if your neighbor has the wherewithal to purchase the $3M TIC down the hall from you, the level of risk is probably lower for you as an owner. My guess is that many of the units will be cash sales from buyers who are downsizing from larger homes in the north end of town. In some ways, these buyers will likely view 1100 Sacramento as more of an east-coast style co-op. Though you don’t share title in a co-op, you basically buy shares of the corporation that owns the building. Co-ops are popular in New York, but there are only a few such buildings in San Francisco, and they’re ironically located in the immediate vicinity of Park Lane.

There are reportedly a handful of lenders willing to finance purchases; Sterling Bank is requiring 40-45% down, and interest rates are below 5%.

If Park Lane is successful in selling all 33 units, it will raise the bar for luxury TIC ownership in San Francisco—and undoubtedly encourage building owners in desirable neighborhoods to follow suit.

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