TIC Owners Caught in the Downturn

While the commercial real estate market waits to bottom out, dozens of smaller buyers who pooled their dollars to buy office buildings during the boom may be in worse shape than large institutional investors.  These tenants-in-common (TIC) funds, which allow smaller investors to own multiple office buildings together, are facing the same issues as giant retirement funds and institutional owners – higher vacancies, falling rental rates and frozen credit markets.

Lenders are skittish about refinancing loans due on properties with multiple owners who may be unwilling or unable to add equity or pay for buildings costs, such as commissions and management expenses.  This places fund owners in a tricky position.

TIC funds let up to 35 investors acquire properties they couldn’t afford independently.  The mechanism also lets them defer capital gains on properties they’ve sold by rolling the proceeds into another property – known as a 1031 exchange.  Careless underwriting standards and overly rosy projections failed to project that lease rates would fall while vacancy rates rose.  As a result, investors expected returns that were impossible to deliver – especially in an economic downturn that has turned a once over-priced office market into a soft one with increasing vacancies that reduce cash flow.