An estimated $30 billion in TIC financed projects face maturity dates over the next 24 months and the market isn’t very receptive to refinance. That sobering reality will shock many tenant in common investors; a group that we fear isn’t ready for what is coming.
TIC projects were made possible by an IRS revenue ruling in 2002. The IRS allowed individuals to pool their section 1031 tax free exchange proceeds and invest in larger projects. The typical TIC investor is bright, educated but not a professional real estate investor.
TIC promoters made it possible for groups of investors across the country to pool their money in invest in office buildings and shopping centers. Suddenly, the average investor could have a seat at the “big table”.
Unfortunately, many of the promoters that rushed into the fledgling TIC marketplace were crooks or novices themselves. Companies like DBSI, Cabot Investment Properties and Tony Thompson. All of these folks ran into regulatory problems. The senior management of DBSI were carted off to prison. Carlton Cabot is likely headed there himself.
Although most of the bad TIC scams have been uncovered, the industry now has a bad reputation and banks don’t like the tenant in common structure. That is bad news for those TIC projects facing imminent maturity dates.
Many of the projects that are still around were financed in 2006 and 2007. These loans are usually part of a Commercial Mortgage Backed Securities (CMBS) trust that has a 10-year loan maturity date. That means the loans are coming due in 2016 and 2017. By our estimates, there are $30 billion of these loans that will come due within the next 2 years.
As noted before, the average TIC investor is very bright but not particularly well versed in the commercial real estate world. Because the project has generated sufficient income to meet monthly debt service, many assume the loans will just get rolled over. TIC projects have fallen out of favor, however, and many of these projects remain undercapitalized despite the ability to generate sufficient cash for debt service.
These problems are not insurmountable but workouts take time. Waiting until the last second is an absolute recipe for disaster. Unlike the residential lending industry with its many consumer friendly rules and protections, the CMBS world is the wild west and the big loan servicers act more like highway robbers.
Exceed the maturity deadline by one day and you may face hundreds of thousands of dollars in late fees, penalties, legal fees, default interest and the like.
Solutions to these problems can include rollups, conversion to a Delaware statutory trust structure or sale of the project. Remember, however, that these things take time.
Because these projects relied on tax free exchange monies from each TIC, the tax consequences for each member may vary too.
One more variable to consider – the average TIC investor is in his or her 70’s. Many are in nursing homes or assisted living facilities. Just rounding up all the investors can be a chore and getting them to make a large capital contribution is nearly impossible.
Top that off with the reality that most of the tenants in common in any given project have never met one another and are not organized. The promoters are long gone. While most groups have some sort of informal steering committee, those with active steering committees are in the best position to survive.
Time is running out. The time to take action is now.
We have represented hundreds of individual TIC investors and several TIC projects. From our experience, it is better to tackle these problems now instead of waiting for a maturity default to occur.
If you are a TIC group or individual tenant in common investor facing a loan that matures this year or next, call us immediately.
MahanyLaw and Judge, Lang & Katers – America’s TIC Lawyers
Attached is a list of TIC projects. We believed it to be accurate when first published by us in April 2013:
- AEI Fund Management Inc
- American Capital Group
- American Investment Exchange
- Argus Realty Investors, LP
- Ashforth Paradigm Capital Advisors
- Atlas Venture Partners, Inc.
- B&H Real Estate Holding, LLC
- Behringer Harvard
- BGK-Integrated Group
- Bluerock Real Estate LLC
- Bonaventure Realty Group, LLC
- Bucks County Office, LP
- Cabot Addison
- Cabot Ashtabula
- Cabot Broward
- Cabot Creekside
- Cabot Cypress Creek
- Cabot East Town
- Cabot Golf
- Cabot Investment Properties
- Cabot Northpark
- Cabot Oak Grove
- Cabot Trafalgar
- Cabot Turfway
- Capital Equities
- Capital Real Estate LLC
- Clearview Apartments
- Cole Companies
- College Park
- Cottonwood Capital, LLC
- Covington Realty Partners
- DBSI Group of Companies
- Desanto Realty Group
- Direct Invest LLC
- Dividend Capital
- Eliason 1031 Properties Corporation
- Equitable Companies, LLC
- Evergreen Realty Group
- ExchangePoint Properties, LLC
- First Guardian Group, LLC
- FOR 1031
- FORT Properties, Inc.
- Franklin 1031 Investments L.L.C.
- Gemini Real Estate Advisors, LLC
- Grand Peaks 1031 Properties
- Granite Investment Group, Inc.
- Griffin Capital Corp.
- Independent Financial Group
- Inland Real Estate
- International Realty Advisor
- Investment Properties of America
- KBS Capital Markets Group, LLC
- Kodiak Capital Partners L.L.C.
- Meridian Realty Advisors, LP
- Moody National Companies
- National Exchange Advisors, LL
- Noble Royalties, Inc.
- ORIX Real Estate Capital, Inc.
- Parthenon Realty 1031 Investors, LLC
- PASSCO Companies, LLC
- Pennbridge Capital
- Poplar Avenue, LLC
- Principle Equity Management
- Rainier Capital Management, LP
- Real Estate Partners, Inc.
- Real Estate Value Advisors LLC
- REEF Oil & Gas Partners
- Resource Real Estate, Inc.
- RK Properties
- Sagebrush Realty Holdings LLC
- SCI Real Estate Investments, LLC
- Sequoia 1031 Companies LLC
- SRS Investments, LLC
- Tax Strategies Group
- Texas Energy Holdings Inc.
- The Geneva Organization
- The Woodlark Companies
- TIC Capital LLC
- Tic Properties
- TREC Investment Realty
- TSG Real Estate LLC
- U.S. Advisors, LLC
- Wells Real Estate Funds
- Western America Equities LLC