How far in advance of the loan maturity date should we begin the sales process?
Many will find this answer surprising – but we recommend starting the process 2 to 3 years before loan maturity. Here’s why more time is needed for TIC owned properties. First of all, due to fact that any sale will require unanimous approval of all owners, in depth discussions with all owners should begin early to form a strong consensus on an acceptable sales price and other key deal terms. Prior to detailed discussions with all owners, at least 60 days will be required for brokers to develop and present sales projections or so-called Broker Opinions of Value (BOVs). Additional time will be needed for all owners to digest this information and form a consensus on what terms they will agree to.
It is not unusual that there will be strong disagreements between owners during this initial stage that will slow the process – and some owners may simply refuse to support a sale under any circumstances pending more discussion and information sharing. Such dissenting views must be identified early and neutralized since, if discovered later in the sales process, these negative sentiments could derail a lot of hard work and chase otherwise willing buyers away never to return. The marketing and closing of a TIC owned property can take as long as a year or more – and if the initial buyer falls out of contract for any reason, owners should allow enough time before loan is due for a back-up buyer to complete the transaction.
Finally, if your loan is coming due in 2015-2017, it may make sense to begin monitoring your property ahead of the tidal wave of other properties with maturing loans.
There are several owners in my group who want to refinance rather than sell. Given the requirement of unanimous approval for either option, what steps do you recommend to arrive at a consensus?
Based our experience with many TIC groups, we have repeatedly found that owners’ interest in refinancing dramatically declines once all the related issues have been presented and discussed. The first challenge is that lenders no longer make loans to TIC ownership structures. Prior to beginning a loan application lenders will require a roll-up of the TIC ownership structure into a new LLC structure along with the appointment of one or more Managing Members for the new ownership entity. This process can be expensive and time consuming – and requires unanimous approval which may be difficult to obtain.
A more serious obstacle however is that a lender will also require some degree of personal loan guaranties from at least some of the owners. Once the fine print of these new loan guarantees sinks in, interest in refinancing often quickly cools. Lastly, if the property lacks sufficient reserves, as most TIC properties do, lenders will require that additional capital be invested to meet required loan ratios. All these factors result in less than 1 in 20 properties being refinanced thereby leaving a sale as the only option that can win the approval of all owners.
What do TIC owners need to understand about selecting a broker to market their properties?
Finding the best broker to assist with marketing a TIC owned property requires additional important considerations. The first is to evaluate the depth of experience of the broker has in successfully closing TIC owned properties. Among the first questions that brokers receive when they contact sophisticated buying groups is “Is this a TIC-owned property?” If the answer is “Yes” – the discussion often ends right there. Why? Institutional buyers have learned though bitter experience that the acquisition of a TIC-owned property can be a very risky proposition.
Buyers know that there are many things that can go wrong and cause lack of execution including the need to obtain unanimous approval by all owners of any and all changes that occur throughout the sales cycle. Unlike other owner groups, TIC groups unfortunately have developed a reputation for being fickle and hard to work with – and also often requesting unrealistic non-market terms on deals that they do. Buyers now know that only one TIC owner can kill a deal. And since buyers invest between $15K to $50K and months of time to conclude a purchase due to the required legal and due diligence efforts, the costs of a failed execution are very high to them. That is why qualified buyers will insist on only working with brokers who, like our firm, have a deep and extensive track of successfully closing TIC deals and overcoming all the challenges that are likely to come up.
Even brokers with stellar track records of closing normal commercial real estate sales will be seriously challenged by the many unique issues that can arise during a TIC transaction. Even presuming that they get buyers to work with them in spite of their lack of TIC experience, conventional brokers simply do not know how to effectively deal with TIC issues including owner dissention, reacting to changing deal terms from multiple owners, dealing with challenging TIC lender issues, and managing the highly complex and unique closing process involving escrow officers and title personnel who often need to be further educated and carefully managed to successfully close a TIC deal.
How do we maximize the number of offers that we receive for our property?
Since many potential buyers will tend to shy away from TIC owned deals, it becomes extremely important to hire a broker who can maximize the number of qualified buyers that will present offers. Most of our owners are surprised to learn that most brokerage firms do not split commissions or cooperate with other brokerages. Unlike residential real estate sales where cooperation between competing brokers is very common, most of the well-known commercial real estate firms tend to only use their own brokers and agents to find potential buyers. If an outside broker wishes to have their buyer submit a bid, they typically need to have their buyer pay an additional fee for their services since the listing broker will not agree to split their commission with them. This practice is not well understood by TIC owners – and can dramatically reduce the number of interested prospects that make offers on your property.
The main reason we agreed to join Sperry Van Ness (SVN) is that SVN is the only national brokerage firm that splits commissions with all other brokerages. We are therefore able to motivate all other brokers to work with us and bring more potential buyers to our clients. Simply put: more offers leads to more competition which results in higher sales prices.
This video provides a brief overview of our unique approach to maximizing sales prices for owners: http://www.svn.com/difference/
The difference in our marketing approach can add up to millions of dollars in added final net proceeds that owners receive. As an example, two very similar student housing properties were sold last year – one by our firm and one by another well-known brokerage firm that does not split commissions. Our sale closed for over $33M with over 11 offers – whereas the other transaction closed for $27M with only three offers. That’s only one of many examples that really demonstrate the Sperry Van Ness difference.