We've seen this coming. Years ago I sat in my boss's office, and we were wondering about the intelligence of highly levered tenant in common (known in the biz as TIC) deals. Why? Because we were hearing tales of investors having absolutely NO business in these kinds of transactions, such as people putting the profits from their family farm into a shopping center with a 80% LTV loan in the CMBS market. My boss said, "If the market corrects while these people are still in the deal they are going to be literally wiped out."
Now, I'm not saying that is what happened here in this WSJ story, but.... Certainly it is illustrative of what is happening to small TIC investors in real estate deals, in this case a single tenant building where the tenant has blown out but is still paying rent.'
Cherry Road's collapse is an ominous sign for thousands of other commercial real-estate deals in which mom-and-pop investors pooled their money to get a tiny piece of the action. As unemployment and fallout from the credit crunch fuel rising vacancies and declining rents, a growing number of small investors are getting wiped out.
"We ended up all losing collectively $7 million of lifetime savings," says Lynn Rogoff, a New York artist who put $213,000 into the Cherry Road deal. Individual losses range from about $100,000 to $700,000, according to Cherry Road investors.Ugly. And this was a 70% LTV deal originally. I will bet a nickel there are many other deals out there like this. I hope and pray not too many small investors are being wiped out by this market. And I encourage them to seek legal counsel.