Investors say they are innocent bystanders who are paying a painful price for the credit crunch.
The commercial real-estate mess is clobbering lots of investors. Few of them are reeling as much as the 27 owners of 1023 Cherry Road in Memphis, Tenn.
The office complex about five miles east of downtown tumbled into foreclosure last fall because the owners couldn't refinance the $14 million loan used to buy the two glass-and-steel buildings in 2004. They also lost all $7.1 million they invested.
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.
Many such deals were structured as so-called "tenant-in-common" ventures, known by the acronym TIC. Often, the TICs took out commercial mortgages that were packaged into commercial-mortgage-backed securities.
"Now, they're starting to experience problems on the property levels," says Marc Perusse, principal at RSS Advisors, a Denver firm that works with troubled TIC investors. "With the majority of TIC investments being syndicated from 2005 to 2007, the future of many of these assets is extremely bleak."
CMBS delinquencies climbed to about 6.5% this month, an all-time high, according to Trepp, a New York company that tracks the commercial property market. More trouble is looming for small-time property owners because much of the $223 billion of CMBS debt coming due between now and 2013 is in the form of mortgages of less than $50 million.