Meeting The Challenges Of TIC Deals

NEWPORT BEACH, CA—It’s crucial that legacy owners have a realistic understanding of the current value of their property and both the tax implications and financial-return implications of moving forward with the new capital structure, Landmark Capital Advisors director Ethan Schelin tells Schelin is focused on originating, structuring and procuring equity and debt capital for real estate and related assets and recently served as advisor on a deal where Landmark raised $42 million ($32 million in bridge debt and $10 million in equity) for the recapitalization of a 605,000-square-foot office complex in Connecticut. The proceeds will be used to pay off existing lender, stabilize the property, purchase the TIC interests of the investors who needed to exit the investment and roll up the TIC investors into a limited-liability company.

Prior to joining Landmark, Schelin raised capital for institutional real estate clients and sold non-performing assets for a Beverly Hills based advisory shop where he was directly involved in the capitalization or sale of more than $500 million in real estate and related assets. In prior roles, Schelin was directly involved in the acquisition of more than $300 million in commercial real estate assets and the asset management of a portfolio valued at more than $2 billion.

We spoke exclusively with Schelin about refinancing deals that involve tenants in common. What are the challenges to refinancing deals that involve tenants in common?

Schelin: Many of the legacy tenant-in-common transactions that were done in the last cycle involved more than 30 separate TIC investors. These investors live all over the country, come from various backgrounds and are not related to one another. One of the primary challenges from an ownership perspective is to get a unanimous agreement on a major decision such as a refinance. In the past, Landmark has been involved in transactions where a consensus cannot be made and the only way forward is to come to a consent to buy out those particular owners prior to the transaction. At times, it is difficult to simply track down these investors to obtain their necessary signatures just to complete a deal. In some instances, the entire transaction hinges on obtaining the signature of one particular owner that couldn’t be located only days before closing.

From a property perspective, these deals were acquired 10 years ago, at the peak of the last real estate cycle. To a large degree, they were over leveraged and under reserved. We have seen many situations where the property struggles to pay debt service (if it is not already underwater) and has little to no budget to make needed capital repairs or attract new tenants. This makes it harder to lease space and the problems get worse over time. How do you meet those challenges?

Schelin: Organization and communication are key, from a sponsorship perspective. At Landmark, we have been fortunate enough to work with some great sponsors that have had the foresight to plan for a multitude of outcomes during the process. They have contingency plans in place and do a great job of communicating often, and early, with all investors. This plays a big role in getting all of the documentation processed and limiting any surprises that come up. In our experience, these financings can take two to three times as long to close as a traditional transaction if the sponsor and the legacy investors are not organized.

From a property perspective, it is crucial that the legacy owners have a realistic understanding of the current value of their property and both the tax implications and financial return implications of moving forward with the new capital structure. Are there advantages to working with TIC situations?

Schelin: From the perspective of new capital coming into the transaction, these opportunities are off-market and often feature high-quality real estate with strong credit tenancy. What else should our readers know about TIC-related financing?

Schelin: TIC-related financing can be very complex and time-consuming. If they come together, it is very rewarding to have played a part in helping a group of investors recovers capital from a troubled situation.