Terms Every TIC Owner Should Know
1. Bridge Loan - Mortgage financing between the termination of one loan and the beginning of another, usually long-term loan, typically suited for properties in transition or not yet stabilized.
2. Cancellation of Debt Income (“COD”) - Cancellation of Debt occurs when a creditor forgives some or all of a debt encumbering a property. The amount of debt that is forgiven is in most cases considered ordinary income to the borrower and must be reported on their tax returns. Cases in which debt forgiveness is not considered income include bankruptcies, insolvencies and non-recourse loans. Most TIC and DST mortgages were non-recourse.
3. Carve-Out Guarantee - Used by a lender in a non-recourse loan in order to recover damages incurred by the lender, arising from designated “bad acts” performed by the mortgage borrower or related parties. These “bad-acts” include: fraud, theft, intentional destruction of any real estate property, misapplication of insurance proceeds or condemnation awards, material misrepresentations, the filings of bankruptcy or transfers of any portion of the encumbered property not approved by the lender.
4. Commercial Mortgage-Backed Security (“CMBS”) - A security backed by a pool of mortgage loans that may be separated into various classes with varying maturities. Most mortgages used for TIC or DST syndications were CMBS mortgages.
5. LLC Rollup / 721 Exchange - Section 721 of the Internal Revenue Code allows a property owner to exchange their property interest into a new or existing LLC, limited partnership or REIT operating partnership on a tax-deferred basis. This code section is often used when a group of TIC / DST co-owners wants or needs to obtain financing and/or new equity for their property.
6. Loan Defeasance / Pre-Payment Penalty - A fee that may be charged to a borrower who pays off a loan before it is due. Defeasance is a common prepayment penalty structure found with CMBS loans.
7. Loan Modification / Workout - A plan of how to restructure debt in the face of foreclosure. In loan workouts, the borrowers negotiate with the lender to achieve modification of terms to the loan in order to avoid foreclosure.
8. Permanent Mortgage - Long-term mortgage loan, typically five to thirty years in length. Permanent financing is typically obtained during the original syndication, after completion of construction or property stabilization, often to repay a shorter-term bridge loan.