A recent story in the WSJ highlights how the rules have changed. The article details how a group of tenant-in-common (TIC) investors who had purchased an office building in Memphis, Tennessee for $21 million lost all of their equity investment of $7 million. The problem occurred when the loan (which had been placed on a non-recourse basis with Key Corp who latter securitized the loan but held the servicing rights) matured and the management company of the TIC was unable to identify a replacement lender. The servicer's response to the matured note was to foreclose despite the fact that the cash flow from the building continued to service the debt (though the primary tenant had vacated they continued to pay rent). The investors had bought into what at the time would have been considered a conservatively leveraged transaction at 67% LTV. However, today this conservative structure did not help them because despite a 33% equity position (which would have eroded with the market) the illiquidity in the market resulted in a total loss of the investment. Leverage is a double edged sword and engineering of the capital stack may not be as wise as once thought especially for small investors who have limited knowledge of real estate investing and the risks inherent when leverage is added to the equation.
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