Tenant-in-common (TIC) investments were a popular investment choice for retirees during the early 2000s. These commercial property investments were supposed to be low risk and provide a moderate return on retirement savings. Multiple investors pooled their resources and purchased an industrial, multi-family, retail, or office asset. The hands-off management structure seemed alluring and the TIC structure offered a tax shelter from real property gains if the owner purchased the asset through a 1031 Exchange. Unfortunately, many of the TIC investments failed to meet expectations.
One of the common flaws in these risky TIC deals is the non-existent exit strategy. When a TIC loan matures, it needs to be refinanced, or paid off in full; however, lenders are no longer willing to lend to the TIC ownership structure. Many TIC owners want to exit their investment, but are not sure where to begin the process.
There are three popular exit strategies for TIC investments -- a loan restructure, a refinance, or a sale of the asset. The TIC investors' exit options will largely depend on the current performance and value of the asset. Commercial real estate assets generally fall into these three performance categories:
Category 1 Properties - Properties in Category 1 are performing well and have excess equity, 30 percent or more. Almost any commercial real estate advisory firm can use a 721 Exchange to simplify the ownership structure and easily refinance, restructure, or sell properties in this category to maximize returns for the owners.
Category 2 Properties - Category 2 properties appear to be stable and performing well. In most cases the owners are still receiving steady distributions and hearty quarterly reports. However; these owners may face unexpected hurdles or even roadblocks when refinancing. Untimely lease expirations or inadequate equity can inhibit the lender from refinancing. Most owners will need a professional restructuring firm to "roll up" the ownership through a 721 Exchange, find leverage, and secure fresh capital. Restructuring and refinancing can be viable exit strategies for these assets; however, a sale will usually not be the best option for the owners.
Category 3 Properties - Although our economy is stabilizing, many TIC properties are still in Category 3. These properties are troubled, underwater, and in need of a workout. Assets in this category could also have significant deferred maintenance or simply have a dwindling reserve fund. For owners of Category 3 properties, a restructuring is the best exit strategy available. And most owners will need to wait a few years to exit the deal in order to secure any return on their investment.
In the end, the exit options described above will most likely come with some level of stress and a few unforeseen bumps in the road. Many TIC investors choose to minimize this stress by hiring a team of professionals to unite their group and lead them through the restructuring, refinancing or sale. While many TIC investors are savvy commercial real estate professionals, in most cases, a multidisciplinary team of seasoned experts is needed to implement the selected exit strategy.