My prior posting briefly describes two typical tenant in common structures ("TIC"), and then addresses some of the issues effecting a workout where the borrower is a TIC. (In a workout, "TIC" rhymes with ______.)
Here are two other major topics that come into play:
- Documents: How do the loan documents, the TIC documents and possible new documents address the following topics –
- do the documents properly address the 15-part test articulated in Revenue Procedure 2002-22 (thus allowing the TIC investment to be classified as an investment in real estate, and not as an investment in a partnership)?
- does the TIC structure comply with federal and state securities laws? (Does the documentation and records of the TIC sponsor support the view that the TIC interests are a security? The Sunwest senior living law suit shows that the SEC will actively pursue TIC sponsors in the proper case.)
- do the notice provisions require actual delivery of written notices, or is delivery deemed given when sent? (This topic is huge: actual, physical deliver of notices to a large of TICs can be difficult.)
- how do the documents address removal of the manager of the TIC or of the master lessee? (See my prior posting for a depiction of the two typical TIC structures.)
- how difficult will it be to engage a new manager? (Beware of the scope of the indemnifications required by this new manager.)
- are the TICs willing to "roll up" the TIC structure into a single entity (such as a limited liability company)?
- Tax Picture: What is the tax situation of each TIC?
- Typically, each TIC has a low basis due to the 1031 Exchange (Consequently, a forced sale of the collateral, a deed in lieu of foreclosure or forgiveness of debt may create "phantom" income to the TIC investor, which results in a taxable gain for federal income tax purposes.)
- This tax issue could be the motivating factor for a TIC in a workout or restructure
These fundamental topics will control a workout or restructure of any commercial real estate loan where the borrower is a TIC.*
If you have questions or comments on these topics, please post them below.
* While I have given presentations on this topic, special thanks to these Winstead lawyers, who gave me additional information prepared by them: Eli Columbus, Erick Weiting Hsu, Jeff Matthews, Ed Peterson & Brian Short.