–By Sunny Sajnani, Senior Director
A couple weeks back, I went to a commercial real estate finance symposium in Dallas hosted by the Bisnow daily newsletter. There were two guest panels, a debt panel and an equity panel. Both were very informative as we heard opinions and live market feedback from 5 leaders of each sector. The debt panel consisted of two CMBS conduit lenders, a bridge lender, a life insurance lender, and an agency lender.
One topic that peaked my interest was the issue of debt to TIC (Tenant In Common) borrowers. All of the panelists quickly responded to the question, “Will you lend to TICs?” with “NO… not a chance!” One of the conduit lenders quickly amended his statement. He stated that under standard TIC structures with 20-30 different borrowers, a new debt deal could not get done, but they would consider a loan request if the individual TICs were rolled into a Limited Liability Company (LLC or another form of a single purpose entity).
Almost two years ago, when CMBS 2.0 platforms first started popping up, MCA worked on the refinancing of an office building in Houston that was owned by twenty-seven TIC owners. It was a great property with an excellent location and was 100% leased, but we were skeptical that the building could get refinanced under the current ownership structure. We quickly went to the drawing board and started doing research on how to get this deal done. We wrote a playbook for our client and were successful closing the deal with a NY-based conduit lender.
Here are a couple ingredients to the recipe:
- Bankruptcy Remote Single Purpose Entity (SPE) – This is a must unless you only have two or three TIC owners. If there are more than three, a new roll-up entity (LLC, LP, etc.) will be required by a new lender in, or to get off, first base. We have been advised by several tax consultants that rolling a TIC ownership group into a new SPE is not a taxable event.
- Carve-Out Guarantor – Since most TIC ownership group were syndicated by companies that are no longer around, a new carve-out guarantor will have to step up to the plate to indemnify the new lender against environmental issues, fraud, etc. Typically lenders today prefer a warm body (person) to guaranty the carve-outs, but an entity with substantial liquidity and net worth can sometimes be substituted. In many instances the asset manager will sign on behalf of the new partnership.
- Reserve Requirements – Lenders will most likely require heavier than usual TI/LC and Capex reserves. Since the new debt will most likely be non-recourse (usually none of the individual TIC owners will take on that risk), the new lender cannot bet on the borrower’s ability to raise additional capital if a new lease is signed or if the building needs repair. Thus, the lender needs to be extremely comfortable that the partnership is sufficiently capitalized throughout the entire term of the loan.
TIC deals are difficult in today’s credit environment, but they can be done with the proper help. For the rest of the “TIC Owners Needs New Debt” recipe, call one of MCA’s seasoned financiers to help you properly structure your next deal.