So what just happened? You’ve been hit by one of the predators flooding the TIC industry.
These predatory companies enter the picture like wolves stalking their prey, pr with the promise of turning around what is usually a distressed property. However, underneath the wolf’s feigned promises of improved management, lies a sinister motive – the desire to acquire the property owned by TIC owners for pennies on the dollar.
Lacking a watchful shepherd, the trusting and inattentive owners sit idly by as the wolf dr ins reserve accounts and makes unnecessary and predatory loans. Having consumed all the property’s resources, the wolf then finishes off its prey by proposing a plan that allows it to acquire part or all of the property’s equity or even the property itself.
Over the last six years, many TIC owners have been struggling to hold on to their properties. They have funded capital calls, they have changed asset managers, and they have held their breath for an improving economy. When TIC sponsors created the investment programs, they would regularly acquire the property and resell it to the TIC owners only a few days or weeks later for $1 million to $10 million more. Even in a thriving market, it is difficult to justify such an increase in such a short period, and it is nearly impossible for a property to recover from being buried in debt from day one.
Although the economy is now improving, many of these TIC owners remain in the same circumstances, with property values less than, or equal to, the balance of their loans, and with loan terms that are likely maturing on or before 2017. Predatory asset managers and consultants have entered the scene with business plans focused on owning these properties and squeezing out the owners entirely.
Many of the predators are the same companies that originally syndicated the properties to the TIC owners.
As certain sponsors and managers have struggled, many have “sold” their management portfolios to new asset managers. This often happens without approval of the TIC owners or lenders. So, one day, a TIC owner receives a letter from an unknown company saying, “I am your new asset manager,” even though the Revenue Procedure requires that all TIC owners unanimously approve the engagement of a new asset manager.
Additionally, loan documents universally require lender approval for a change in asset management. These struggling sponsors, who are seeking to capitalize on their own demise, justify their actions through loopholes they drafted into their own documents. The failing sponsors will engage these new predatory asset managers as “sub-asset managers,” which does not require lender or owner approval.
Alternatively, they will simply sell the company that is the asset manager to the new predatory third party. The TIC owners are then forced to work with a new manager that they never met, never approved and do not want. Nevertheless, because the owners are fatigued and not organized as a group, they fail to object and continue to hope for the best. If the TIC owners suspect that their sponsor or asset manager may be insolvent, it is critical for them to get ahead of the game, get professionals involved, and take action.
Upon assuming management, the new asset manager will tout its qualifications and provide assurances and rhetoric about how much better this new asset manager is going to be for the TIC owners. Nevertheless, the business plan of the predator is as follows:
• Take over a portfolio.
• Allow properties to fail through negligence, mismanagement and general lack of attention.
• Drain reserve accounts, make predatory loans, and sometimes even steal operating cash.
• Need for new capital arises, sometimes as a result of predator’s actions or inactions.
• Provide new capital in exchange for a huge percentage of the property.
The manager simply blames the economy, the market, or any other number of factors for the property’s decline. Not wanting to lose the property to foreclosure, and seeing no other alternative, the owners consent to the predator’s plan.
Of course, the majority of asset managers and consultants in the TIC industry are honorable, credible and have the best interest of the owners at heart. Unfortunately, there are also many who do not. Here are a few tips to identify a credible manager or consultant versus a predator:
• Don’t engage anyone that attempts to obtain your engagement through fear.
• View skeptically consultants agreeing to waive fees in exchange for a large percentage of your property.
• A credible asset manager will welcome questions and will not be defensive in answering.
• Be suspicious of any asset manager that incorporates in their agreements the right of the asset manager to purchase interests rather than the other TIC owners.
• Seek an asset manager that will share all financial information on the property and also identities of the other TIC owners.
• Run from any asset manager who bullies owners on calls to accomplish their agenda.
• Be very conscious of double talk and vague answers to specific questions.
Time to act
What can the TIC owner do to protect an interest? First, recognize that a TIC structure under the Revenue Procedure should not create a passive investment. All TIC owners must approve all asset managers and all TIC owners must approve all leases. While TIC owners may have purchased their TIC interest hoping to be a passive investor, they must now become an active and involved owner. The TIC owner cannot rely on anyone else to look out for its best interest. TIC owners are entitled to answers, so ask questions. Don’t tolerate being put off or ignored.
TIC owners need to read all of the information that is delivered by the asset manager. The financial statement should show what is going on with the property. Watch the reserve columns. If the property has substantial reserves one month and none the next month, there is a reason. If the owners don’t clearly understand the reason, it may be that the asset manager has inappropriately utilized those funds. If the owners have any suspicions, investigate further. A good and honorable asset manager will not shy away from questions about the property or the property’s performance. They will welcome active participation by the owners.
Owners should also coordinate among themselves. Ask the asset managers for contact information for fellow owners. Owners should coordinate on a regular basis, without the asset manager involved. Many owners have continuing relationships with the broker dealer and registered representatives that sold them the property. Through their knowledge and contacts in the industry and their history with the property, these brokers can be very valuable assets to the TIC owners. Ask for this help and involvement, particularly with respect to keeping apprised of what is going on in the industry.
Having the owners working together for the benefit of all is of critical importance in obtaining a good outcome.
Finally, if you have reason to suspect something is awry, seek professional guidance. There are a handful of good TIC owner group lawyers and consultants across the country who seek to aid TIC groups in working through challenging situations and defend against predators. The information communicated in this article is not intended to terrorize TIC owners or to imply that all is lost. However, all TIC owners should decide that it is time to become an active owner. Don’t let a TIC owners’ desire to own passively allow a TIC predator to devour the property.
Coni Rathbone is a real estate and business transactions lawyer in the Portland metro area who specializes in representing tenant-in-common (TIC) owner groups all over the country. Contact her at 503-968-8200 or email her at email@example.com.