NetLease Q & A: New TIC Structures Proposed by Prudential Rand’s Rand
- Apr 29, 2008
Since the beginning of the subprime meltdown, various proposals have been made at various levels to ameliorate the crisis, and by extension, the sorry state of the residential market. Interestingly, one idea involves borrowing a page from the tenant-in-common market, and the idea is so new that it doesn’t really have an agreed upon name. Instead of foreclosing on a residential property – anything from single-family to owner-occupied multifamily properties – a lender becomes fractional owners in the property with a borrower who can afford a reduced mortgage payment. The lender receives a piece of equity and the borrower still pays on the financing of his or her share of the property. Foreclosure is forestalled, and possibly both lender and borrower are in a position to ride out the current economic storm. Greg Rand, managing partner of Westchester, NY-based Prudential Rand Realty, is currently advising some of his clients about setting up these TIC-like structures. CPN spoke with him recently about the idea. CPN: How does is a TIC-like structure applied to a residential default situation? Rand: It’s a TIC arrangement — technically a tenant-in-common structure. TICs have provided solutions to various challenges in real estate before, such as allowing smaller investors to get a piece of a commercial property that would otherwise not be available to them. A lot of banks that a significant portfolios of defaulting properties want to avoid foreclosure events because of the expense and uncertainty involved. We’ve been advising them to use a tenant-in-common structure to offer a defaulting borrower the option of becoming a fractional owner of the property with the bank. So instead of being a lienholder on the property, and foreclosing in the event of non-payment, the bank has an equity stake in the property, which allows the borrower to make a smaller mortgage payment, because it’s based on a smaller mortgage amount. The bank isn’t taking the property back, but instead is taking a passive interest in the property.CPN: That solves the immediate problem, but what about the longer term? Rand: Assuming the value eventually rises – five years from now, or more, because it might be a long downturn — the bank can eventually sell its interest in the property. It can ride the market back, and either refinance the borrower and allow him to buy the bank out, or both the bank and the borrower can sell to a third party and cash out. CPN: Just how new is this idea? Rand: Pretty new. One of our major foreclosure accounts came to us and said that they had too much volume on the horizon. They asked us for ideas. One thing that every real estate has is faith in real estate – in its mid-term and long-term appreciation. The idea of riding out a market slump relies on this faith. So we latched on this solution, which offers an option besides foreclosure in some cases. It’s only now percolating through the banking industry, as the banking industry figures out how to do it, legally speaking. But I think it will catch on as a way to deal with the foreclosure crisis.