Boca Raton, FL, May 16, 2017: QuickLiquidity, a leading private equity investment firm providing equity recapitalizations and subordinated debt on commercial real estate, has announced that it has funded $6.9 million of subordinated debt to complete a tenants-in-common roll up. The roll up is on a portfolio of over one million square feet of manufacturing and warehouse facilities spread across the US in Georgia, Oklahoma, Pennsylvania, South Carolina, and Virginia.
The portfolio was initially purchased in 2006 for $28 million, with $10 million invested by 23 separate owners as tenants-in-common (TIC) subject to an $18 million CMBS loan. The properties are all on triple net leases to a publicly traded company until 2030. In 2016 the CMBS loan had an anticipated repayment date. This meant that in the event that the loan could not be refinanced, the existing loan agreement allowed for an extension of the maturity date provided that the interest rate increased by 2.00% and the portfolios net cash flow was used to pay down the principal balance of the loan. This loan provision is referred to as “hyper-amortization” and is currently in effect. The portfolio was not refinanced in time of the anticipated repayment date because of challenges with finding a lending institution who was comfortable with the TIC structure, and having to obtain consent from all 23 separate owners on the terms of the refinance. Having the owners consolidate into one entity with one managing member would solve both obstacles and allow for the rolled up entity to complete a refinance of the portfolio.
Due to the hyper-amortization being in effect, all of the net cash flow generated by the properties is being used to pay down the mortgages principal balance. Now, while the IRS allows for the interest portion of their mortgage payment to be tax deductible, the principal portion is treated as taxable income. This left the 23 separate TIC owners with zero cash distributions, and a tax liability, which is referred to as phantom income. The owners have to come out of pocket to pay taxes on the mortgages principal pay down, which is the properties entire net cash flow due to the hyper-amortization. The owners were unhappy about this and sought a solution to return their cash distributions.
The borrower recognized an opportunity to roll up the 23 separate TIC owners into one new entity using IRS code 721. This allows the owners to contribute their TIC interest to a new entity without realizing a capital gain or loss. QuickLiquidity’s subordinated debt will be used to purchase TIC interest from the owners who prefer an immediate exit strategy and liquidity over rolling up. Once the roll up is complete and the new entity owns 100% of the portfolio, the borrower will be able to either refinance the properties which would halt the phantom income and return cash distributions, or sell the properties and distribute the sale proceeds.
“Our extensive experience with tenants-in-common allowed us to quickly understand and become comfortable with how the roll up process takes place and the risks involved”, said A. Yoni Miller, Principal of QuickLiquidity. “Because the first mortgage prohibits a second mortgage, we took a pledge of the rolled up and newly acquired TIC interest as collateral. This is something that few lenders would consider due to the lack of control and liquidity that accompanies owning a TIC interest.”
QuickLiquidity is a leading private equity investment firm providing capital exclusively to commercial real estate investors and sponsors on existing properties. The firm offers limited partners a viable exit strategy to their illiquid minority interest positions in LLCs, LPs, TICs, and DSTs; and offers equity recapitalizations and subordinated debt to real estate sponsors that have mortgages restricting cash-out refinances. This is common in loans through high prepayment penalties, yield maintenance, and defeasance. QuickLiquidity allows owners to receive the capital they need while maintaining majority ownership and control of their property.
