Wednesday, February 3, 2010

Cry Me a River

WSJ "reports" on small investors losing out in CRE.
...the 27 owners of 1023 Cherry Road in Memphis, Tenn...lost all $7.1 million they invested...

Many such deals were structured as so-called "tenant-in-common" ventures, known by the acronym TIC. Often, the TICs took out commercial mortgages that were packaged into commercial-mortgage-backed securities.

Cherry Road property's manager, TIC Properties Management LLC, contacted the "master servicer" about a loan extension, according to Paul Aiesi, the company's chief investment officer. But the servicer, KeyCorp, was only in charge of passing along interest payments to the CMBS investors every month. According to CMBS rules, a master servicer has no power to modify loans before they go into default. A KeyCorp representative declined to comment.

Mr. Aiesi says the servicer offered to extend the loan if the investors would contribute another $2 million in equity. He recommended against that move.

"The property is worth significantly less than the debt on it," he explains.

Cherry Road investors say they are innocent bystanders who are paying a painful price for the credit crunch.

"We're not going out to fancy dinners and we're not taking vacations or major trips," says Steve Harris, a retired television-advertising executive who lives in Valley Center, Calif. He declined to say how much he invested in the Cherry Road building.

The article implies this default has something to do with the fact that this was a TIC deal or that the loan failure has something to do with the CMBS market. How shoddy. If roles were reversed and the property was owned by a corporation on Wall Street, and the loan had been made by an artist living in the East Village, the workout would likely have been the same - except the emotion would be removed. It is a 100% vacant office building in West Tennessee, and has been 100% vacant for almost 4 years. The servicer may have been able to let them slide since the rent was still coming in, but they did actually offer them an extension in exchange for new equity - which would likely be required for deferred maintenance, TI/LC, etc. Only then did the owners walked away.


Rational Realist said...

The last paragraph is the key, a small investor with institutional debt and institutional consequences. Investors in many TIC deals don't have the capital to add to these deals. Nearly all TIC sponsors used conduit debt to save about 25 bps v. a portfolio loan from an insurance company. The 25 bps seems expensive now. I agree that the TIC structure is not the problem, and neither is CMBS. These deals are going to have to be consolidated to give investors a chance.

Anonymous said...

I love how they imply that it was the complex structure of the servicing that resulted in a failure to work with the borrower. I think it even implied that if the loan were owned by a bank that the bank would be easier to deal with.

If the borrower actually adds value to the assets (i.e. local owner with local knowledge and connections) it might make sense for the servicer to extend. But this is a collection of non-pros who can't even add any more equity to the deal. Foreclose and be done with it!

Article failed to mention that TIC buyers were some of the worst buyers out there, buying at ever decreasing cap rates. The tax motivations somehow trumped common sense.