The Kinds of Tenant in Common Structures and Their Advantages

Wally Smith:
We should talk about tenant in common, TICs. TICs have been around forever. There’s some big pros and cons about TICs. What’s good, what’s bad? Why don’t we see them as often anymore?

Jeff Hertz:
When I first got into the space and I got into the securitized real estate space right when DSTs were being created in 2004, really just almost before they became created. When I came into the space, you had the TIC structure, and these were, I guess I would say there are, just for clarification, there are two types of TICs. There are securitized TICs where a sponsor will go out, acquire asset, and break it up into fractional components that individual investors are then going to invest into. And that industry was in high gear in the mid 2000s. I think at one time there was many as 75 different sponsors offer offering TIC programs.
There are also TICs that a few family members or business associates may create where they buy a building and then they set up a tenancy in common where they each have a fractional ownership of it, and there’s nothing wrong with that structure. As I said, it is probably the easiest to handle as far as liquidity and dissolving it. Where the securitized TICs got into some challenges, is number one, you had to have a unanimous consent. Let’s say we issue a TIC, five years later, we have an opportunity to sell the asset. You needed to get the consent of all 35 investors involved.

Wally Smith:
It is still a 35 limit.

Jeff Hertz:
There’s a limit of 35. Exactly. So it could have fewer than 35 investors. Secondly, because you can only have 35 investors per program, the minimums per investor got higher and higher as these deals got larger and larger. I personally saw offerings in the market back in 2004 or five that had a million dollar minimum, which meant that if you had less money than that you probably couldn’t invest in it. And you had concentration risk because you were putting so much money into one potential program. Finally, really more of a timing standpoint, a lot of TICs that were created in the early 2000s were in a mode where they were using generally shorter term financing than you see today, maybe five years.
Fast forward to 2010, 11, 12, the lenders had a real issue with those because each individual investor was on title and on the mortgage themselves. So they had to be underwritten. In the midst of the great financial crisis the banks just didn’t want to underwrite 35 smaller individual investors.

Wally Smith:
There’s several reliable. Aren’t they?

Jeff Hertz:
Exactly. They were also had recourse on the loans. There were a lot of issues, but I think it ultimately took the great financial crisis to see what those deficiencies were in real time. But TICs can also have some other, like I said, some positive aspects. You can have capital calls where you could ask the investors for more money if the property needed it.

Wally Smith:
That’s good for the TIC.

Jeff Hertz:
It could be good for the TIC, not necessarily for the individual investors.

Wally Smith:
Can you have a TIC that does not have several liability on the loans?

Jeff Hertz:
Not that I’ve seen. I think ultimately it would depend on the lender. If the lender felt that the asset and the sponsor of the TIC was substantial enough that they may not require that level of recourse, but suffice to say in today’s world I think the lenders are at a point where they want to have people to have skin in the game.

Wally Smith:
Well, without naming names, there’s a huge, huge building project going in in Chicago, and it’s in a TIC structure. And so what we’ve seen is, TICs may be great, they may be the perfect solution for a lot of people, but we run into people who are thinking of getting into them and they’re just not sufficiently sophisticated, understand the risks you talked about, the unanimous consent needed to do pretty much anything. There’s several liability, the potential for capital calls and that sort of thing, but the promises they can make is that, hey, put all the money in and then we’re going to give you a great tax free return of capital in a couple of years. That’s one of the things we run into a lot, and people feel like, hey, this is great. I’m going to get a 1031. I’m going to get my cash to work with, and there’s no risk. There’s no problems. No such thing as no risk.

Jeff Hertz:
I liken it to a school bus with 35 steering wheels. Ultimately you need to have, as much as people oftentimes don’t want to relinquish control of their investments, they want to be in control of them, but in, again, a securitized TIC structure, ultimately you’re putting your money in with as many as 34 other investors whom you don’t know and you have no relation to. I actually did see a long time ago at my previous firm, a sale of an asset that was held up by literally one or two rogue investors. So maybe not the best structure to own-