TIC-tenant in common

There have been many articles recently on TICs.  First, what is a tenant in common (TIC)?  A TIC is a tax structure that allows investors to pool their funds with other investors to purchase real estate.  For example if I had 20k that I got from selling a commercial property.  I could take these funds to a TIC and purchase a share of a commercial property.  For example 35 or 40 investors might purchase a shopping center in Phoenix.  By rolling your money into another like property (1031 exchange), the investor can avoid paying capital gains taxes.  This all sounds nice and like a great idea except there are major risks that are not fully apparent.

According to a WSJ article (www.wsj.com ) DBSI (http://blog.dbsi.com/ ) recently filed for bankruptcy protection.  DBSI was one of the largest TIC providers in the country.  My theory for what brought DBSI down is as follows.  The theory is true for most TICs that I have evaluated.  Most small individual real estate investors are fairly unsophisticated.  They have little experience in valuing large commercial properties (cap rates, average vacancy rates, leas-up rates, etc…) and therefore they relied on the expertise of the TICs for valuation and management of their investment.  About six months ago we were approached to finance a TIC investment on a shopping center in Georgia.  The fundamental assumptions were flawed.  The TIC provider sold partial interests to investors all over the country.  The property was valued on a 6% cap for a class A/B retail in a nice area of Atlanta.  The trouble occurs because the property was purchased on a 6 cap, as opposed to a 7.5 or 8% cap.  This cap rate continues rising which means the value of the property is less than what the investors originally paid for it.

As the economy shrinks, tenants begin to renegotiate their leases (or move out like circuit city did of many locations).  This further deteriorates the value of the property.  At the same time the small TIC investors get restless, the property is managed by a consensus vote of all 35-40 investors in that particular transaction.  Imagine trying to get 35+ people who all have different motives, risk tolerance, etc… on the same page to make a unanimous decision.  This decision making further deteriorates the value of the property since decisions are very slow and can seem erratic.

It will be interesting to see how other TICs fare in this economy.  If I were investing my money in real-estate, I would think twice about utilizing a TIC. 

For more information on commercial lending valuation,

please see: http://www.fairviewlending.com/underwriting.htm#4  as well as my recent blog on cap rates:

http://fairviewlending.com/blog/?p=23

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Hard Money Commercial Lending

I’m commonly asked about hard money commercial lending.Many folks are confused about what it is, how it is different than traditional lending and resources available for borrowers/brokers.Fairview Commercial Lending specializes in hard money commercial loans.The loans are commonly referred to as no-doc, stated or various other names.Fairview underwrites, funds, and services all of its loans as opposed to many other companies in the marketplace that merely broker loans they originate.

What is a Hard Money Commercial Loan?

The definition of “hard money” when referred to in real estate financing, is essentially a non-bankable loan. The name hard money is frequently interchanged with “no-doc” or private loans. For a hard money commercial loan, the underwriting decisions are based on the borrower’s hard assets (real estate).There have been many questions asked regarding how lenders evaluate hard money commercial loans.I have created a FAQ page which outlines the common questions and answers (http://www.fairviewlending.com/underwriting.htm#4 ).Finally hard money loans typically close relatively quickly. Fairview Lending is the leader in hard money lending (NO-DOC / Private lending)

Hard Money verses traditional lending

Traditional loans from banking institutions rely heavily on borrowers income, credit, tax returns, etc.. as opposed to hard money’s primary reliance on the hard real estate asset. Along with requiring substantially more documentation, conventional lenders have minimum credit scores (typically high 600 Fico and above) as opposed to hard money loans that are underwriting on the collateral as opposed to the borrower’s credit (Fairview Lending has closed loans with FICO scores in the low 400s). Along with different underwriting standards, loans on conventional commercial loans can take months to close; hard money commercial loans close much quicker. The final important differentiator between hard money and conventional financing is the interest rate. Since there is more risk in a true collateral based loan, the interest rates are higher than a conventional mortgage.

When is a hard money commercial loan appropriate?

Although hard money commercial loans are not always the appropriate solution for a client, there are numerous circumstances where a hard money loan is the best option for a client.

1. Borrowers with impaired credit (Fairview Lending can lend to borrowers with any credit)

2. Tax Liens/Judgements/unpaid utility bills, etc…:

3. Partner Buyout

4. Owner Occupied properties

5. Time constrained borrowers

6. Foreclosure avoidance

7. Foreign Nationals

8. Complex loans with multiple pieces of collateral

Below is a list of valuable resources relating to hard money commercial lending.

• Key tips prior to utilizing a hard money loan

• What is private/no-doc lending vs. hard money lending?

• How are Hard Money loans underwritten?

• What is Fairview Lending’s loan process?

• Can I broker a loan to Fairview Lending?

• I have never done a commercial loan, how do I switch from residential lending to commercial lending?

• Understanding the total cost of a loan Prepayment verse Interest Guarantee / Lockout / Defeasance

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I am frequently asked about capitalization rates (Cap Rates).  The questions range from what is a Cap Rate, how is it determined, and which direction the cap rate is moving.

1.     What is Cap Rate?
This is the rate of return that a reasonable investor would expect to receive as a result of their investment

.2.     What Cap Rate do you utilize when valuing a property?
Each property and market is unique. There is no blanket cap rate used in our underwriting.

3.     How is cap rate utilized?
The cap rate is utilized in underwriting to determine the value of the property based on the income approach.

4.     What is the formula to calculate value based on the income approach?
One method to determine the value of the property is to take the net operating income/cap rate.

Cap rates are rapidly changing in today’s market.  Various factors go into determining the cap rate (vacancy, market conditions, expectations on future inflation and interest rates, property condition, property location, etc…).  The value of the property moves in inverse to the cap rate; the higher the cap rate, the lower the value and vice versa.  In today’s market, I have been seeing cap rates rising by a couple hundred basis points.  For example a small retail center 12 months ago might have been trading on a 7 cap; that same property today is likely trading closer to a 9 cap.  As a result the value of the property has declined and lenders will likely lend less on the property today due to its decrease in value.  More information on cap rates can be found at http://www.fairviewlending.com/underwriting.htm#4 or on our resources page http://www.fairviewlending.com/resources.htm .Contact us at info(at)fairviewlending.com if you have questions about small balance commercial lending, hard money lending, or private commercial lending.  Fairview is the expert in all of these areas.

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