More hurdles ahead

Many TIC sponsors, along with individual TIC property owners, are preparing for major operational challenges in the coming year related to refinancing and tenant retention issues. What that means for TIC owners is that there will be a greater risk of capital calls, lower yields or suspended yields as cash flow disappears.

Real estate owners with maturing debt face major hurdles in the refinancing arena due to the severely constrained capital markets. Traditionally, the majority of TICs were financed with commercial mortgage-backed securities (CMBS) — a capital source that is virtually non-existent today.

“There will be a significant number of CMBS loans coming due in 2009, and the ability to refinance those loans will be a big challenge,” says Duke Runnels, CEO of Fort Properties Inc., a Los Angeles-based TIC sponsor.

An estimated $171 billion of commercial and multifamily mortgages held by non-bank lenders and investors are expected to mature in 2009, according to the Mortgage Bankers Association.

Although Fort Properties does not have any loans coming due in its portfolio, Runnels estimates that the TIC industry will need to refinance up to $3 billion in maturing loans in 2009.

Given the fact that traditional lenders such as banks have tightened their purse strings, which in effect means higher equity commitments and tighter underwriting standards, difficult questions remain as to where that refinance money will come from, and how much it will cost.

In addition, it will become increasingly difficult to retain tenants as more corporations battle to stay afloat in this deep recession. One of the vulnerabilities of TIC properties is that they are typically leased to a single tenant.

“In a market like this, we have redoubled our efforts just on tenant relations — staying in front of tenants and helping them with their issues,” says Runnels. “The last thing we want to happen is for a tenant to leave.”

Last year, Fort renewed many of its leases early to avoid any potential vacancies. The company is now reaping the benefit of that action with a 98% occupancy rate across its portfolio.

Clearly, sponsors will continue to face a number of challenges in the year ahead as they struggle to retain tenants and maintain yields at existing TIC properties, as well as put new TIC deals together that appeal to wary investors.

“It's survival of the fittest,” Hanson says. “In a market environment that is this volatile and unpredictable, whether you're talking about the TIC industry or any other sector, you're going to have consolidation. Those [sponsors] with the better business models will win out.”

Beth Mattson-Teig is a Minneapolis writer.

GIANTS OF THE TIC INDUSTRY

In 2008, the top 10 sponsors in the tenant-in-common (TIC) investment arena raised $883.7 million in equity, nearly two-thirds of all TIC capital raised. Meanwhile, the weakening economy continues to force smaller sponsors out of the business.