Although the Tenant in Common (TIC) ownership structure has been around for many years, the incidence of TIC Legal Entanglements is a small storm on its way to hurricane status in the next few years.

What are the driving factors here?

1. The Great Recession has magnified the weaknesses in the TIC structure
2. The fact is that fractional / passive ownership is not equipped to proactively react to economic distress.
3. In a prolonged recession, the very firms that service TIC properties often are impacted by the same economic distress that affects the commercial real estate environment. This can be a recipe for bad conduct.
4. As a result, TICs often pay higher prices for their operational expenses than do non-TIC properties – and they often receive sub-standard service. This occurs because the TIC structure makes it easier for service firms to charge more and deliver less. Owners are not often in touch with the operational and financial performance in time to make changes.
5. The incidence of intentional financial mismanagement by Asset and Property Management firms is significantly higher for TICs than for other ownership structures.
6. The aggressive Management contracts that TIC investors signed at the time of investment make a change of management unusually difficult.
7. In addition, there are several significant areas in which a conflict of interest exists – and is exploited by the management firms that purportedly have a fiduciary responsibility to the owners.
8. Finally, the majority of TIC Mortgage Loans will mature in the next 1-3 years. Many will default. TIC owners are becoming more aware of the importance of having an Exit Strategy prior to loan maturity.  For some, unfortunately, that strategy may include a legal action to recover all, or a part of their investment in the property.
9. Please note, this commentary is not meant to paint the Asset / Property Management industry as bad citizens; it is just a fact that the above conditions exist to a greater extent in the TIC sector than the other sectors of commercial real estate.

Following is our blog, A Tale of 2 Cities.  This is current and factual information that illustrates some of the extreme lengths that parties have taken in an effort to gain ownership and control of TIC-owned properties in a blatantly and illegal manner.

A Tale of 2 Cities. The following 2 events took place on virtually the same dates, under virtually identical circumstances, and by the same Asset / Property Management firm.  The outcomes were exactly opposite.

May, 2014: City 1– Court says NO to Legal Hijacking Attempt by Asset / Property Management firm

CMS managed the legal team in a successful effort to stop an Asset / Property Management (AM/PM) firm from a hostile takeover attempt.  The property was a large office in the Commercial Business District (CBD) of a major Midwestern city.

In October 2013, the AMPM firm filed a bankruptcy petition as the Manager of one of the TIC LLCs.  As the “Debtor”, the AM/PM firm was given 150 days to exclusively negotiate and present a reorganization plan to the court.

During this period, CMS and the legal team for the TIC owners developed the case that resulted in the dismissal of the bankruptcy by the court in May 2014, and the subsequent removal of the AM/PM firm as the Manager of the LLC.

Despite being outspent by over 10 to 1 in court, the TIC owners retained ownership and control of their Property.

June, 2014: City 2 — Court Rejects Owners’ Motion to Dismiss Legal Hijacking Attempt by the AM/PM firm

In September 2013, the AM/PM firm filed a similar bankruptcy petition in a large Southern city.  In this case, the owners of the property were represented by a different legal team.

Here, the court ruled in favor of the AM/PM firm, and the owners lost control of their property and investment.

What went wrong?  Lack of research?  Poor representation?   A lack of consensus and coordination among the owners?  An intimidation of the potential legal costs?  All of the above?

The answer is All of the Above.

A review of the legal transcripts identifies a lack of research in City 2.  Was this a result of poor representation?  Possibly.

We do know that ownership was split in their resolve to defend the case.  Was this due to the cost for legal representation?  Possibly.

Why would an AMPM firm go to such expense to take over a property they represent?  This is simple – a) because the perception has been that TICs will not fight back, b) there are large profits to be made in acquiring distressed properties, and c) because they could.

Conclusion

In the last 12 months there has been a significant increase in the number of legal actions filed by TIC owners for a wide variety of issues.  There are many qualified legal firms that can provide good assistance to TIC owners.  These firms differ in the types of issues they specialize in and in the manner in which they earn their fees.

CMS is not a law firm.  Please feel free to contact us if we can be of any assistance.