If two is company and three is a crowd, what’s 35? In real estate investing, it’s a TIC syndication. Even in strong financing markets, TIC’s are difficult to finance; but, in today’s tumultuous real estate market, financing these complex transactions has become increasingly more difficult. However, there are still lenders in the market interested in TIC transactions; it’s simply a matter of knowing who these lenders are and what they are looking for.
What is a TIC Syndication?
A Tenancy in Common (or “TIC”) syndication is an investment vehicle whereby portions of the equity in a real estate transaction are sold by a TIC syndicator to a pool of investors. The benefits to the syndicator include reduced equity (and thereby risk), highly leveraged returns, and fees for syndication and asset management. Investors benefit by the potential returns offered, and also by the ability to use their investment in the TIC as a vehicle to facilitate a 1031 tax-deferred exchange. The IRS allows for up to 35 individual investors to take part in such transactions.
Debt Lenders and TIC Syndications
Many lenders in today’s market are unable, or unwilling, to analyze and structure a transaction with TIC ownership. For some lenders, it’s because they do not have the staffing to underwrite 35 separate borrowers. Others are relationship-focused and want each of the TIC investors to be related individuals, not simply passive investors. Still others note the turmoil in the capital markets and prefer only “squeaky clean” transactions. The added risk of fragmented sponsorship discourages them. As such, only a limited number of capital providers can underwrite and structure these transactions. Following is a summary of the key considerations for those seeking TIC debt financing:
Sponsorship: Generally, lenders are looking for strong, experienced sponsorship. Lenders want the sponsor to possess adequate management capability, rather than simply engineering the TIC syndication and passing business plan execution to a third party. Some lenders require the sponsor to invest cash equity of no less than 2%-5% of the total equity.
Product Type: Lenders prefer asset types which are proven commodities, such as multifamily and retail. Other property types may still be financed, but lenders are less interested in high risk categories. Virtually no lender is willing to finance hospitality or special use properties with a TIC structure.
Loan Negotiation: Lenders are less flexible than they once were in negotiating and altering the language of loan documents as they pertain to TICs. This has to do with the increased scrutiny that loans undergo as they go for sale and securitization. Therefore, borrowers should disclose up-front any special structuring their transaction may require.
Underwriting: Regardless of the investment structure, all real estate underwriting has become more conservative since the market downturn. While the lenders willing to finance TICs are more selective than they once were, the underwriting parameters they use are similar to those they use on non-TIC transactions. The underwriting parameters lenders employ are transaction-specific and fluctuate daily, but the following guidelines may be useful indicators:
· LTV: Lenders will loan a maximum of 75-80% of asset value, but prefer lower LTV.
· Underwritten DCR: Depending upon the transaction, lenders are underwriting 1.15-1.30 DCR; generally 1.20 DCR. The limiting factor to the proceeds of most loans is generally cash flow via an underwritten DCR.
· Interest Only: Most lenders’ maximum IO period is from 1-3 years. Some are willing to offer more IO if the LTV is low (e.g. 65% or less) and the DCR is high (e.g. 1.40). Many lenders will not consider any IO
· Spread: The current market is fluctuating from day-to-day, making it difficult for lenders to give any certainty to a credit spread without knowing the details of the transaction; the spread is always transaction specific.
· Material Adverse Change Clause: A factor which has become very important to borrowers since the market downturn is the Material Adverse Change (“MAC”) clause, which allows lenders to re-price the credit spread if market conditions change negatively. Several lenders will consider waiving the MAC clause for a defined spread premium.
Conclusion
Debt for TIC transactions is still available, despite current market conditions. While lenders are increasingly conservative in their approach to TIC financing, compelling investments with strong sponsorship will find reasonable debt financing.
