If someone wants to invest in a deal through a TIC, they are required to receive cash flow/profits in accordance with their pro rata share of ownership.
This is difficult for sponsors because in order to receive a promote on the TIC portion of the deal, they have to sell the TIC owner less then their otherwise entitled share (free of promote) of the entity.
So basically, a sponsor needs to calculate their projected promote JUST on this TIC investment amount and then sell the TIC investor a smaller piece of the entity, as like a built in promote.
I get all this in theory, but am having trouble modeling it.
Any advice?
Based on the most helpful WSO content, modeling a TIC (Tenancy-In-Common) investment with a built-in promote requires careful structuring to ensure the sponsor's promote is accounted for while maintaining the pro-rata cash flow distribution for the TIC investor. Here's a step-by-step approach to help you model this:
Determine the TIC Investor's Pro Rata Share:
Project Cash Flows:
Calculate the Sponsor's Promote:
Adjust the TIC Investor's Ownership:
Example:
Model the Adjusted Cash Flows:
Validate the IRR and Promote:
Document Assumptions Clearly:
This approach ensures the sponsor's promote is incorporated into the TIC investment while maintaining the required pro-rata cash flow distribution. If you're still struggling, consider reviewing similar promote structures in real estate models or consulting with a mentor experienced in TIC investments.
Sources: When does the promote split actually occur?, Promote Structure Alternatives, REPE Entity level investment, Tutorial: How to Model a Real Estate Development Construction Loan, Secondary PE Modeling
I'm not sure I understand what you're asking.
You seem to be saying that the way that you, as a sponsor, can realize a promote in a TIC deal is by selling each of the investors an overvalued piece of the pie. As in, if you need $100 for your deal, you'd solicit $11 from ten separate TIC investors, keeping the excess for yourself?
All of that seems legally dubious and way too complicated. The way to model this is actually pretty simple. You raise your $100 of equity from however many TIC investors. At some point in the mid term (say, Year 5) you model in an anticipated sale event. Obviously you aren't actually going to sell, since you won't get your promote - what you do is collapse the TIC structure into a more traditional ownership model (e.g. LLC) on the assumption that you're safely out of the IRS lookback period, and you have a side letter which allows you to crystallize some kind of promote at that point, so you as the sponsor end up with some percentage of the equity of the new LLC that replaces the tenancy in common.
All of which is super complicated. It's also worth pointing out it does not work for a development deal, as the TIC owners need to own real property on the day of close, and cannot contribute equity to the construction portion of the job.
Just raise the money from a traditional equity source. Much easier.
Could you admit a new member entity to the TIC of which the original sponsor owns a portion along with the intended investor? Then structure a backend promote on that entity to the shareholders?
Sounds like you're specifically referring to a TIC entity that owns multiple properties (multi purpose) but either way, I think you're overcomplicating the matter. Even if the entity is owns multiple properties (outside of your general partnership) and thus limits your ability to insert yourself as the general partner or manager, you draft what is more like a consulting agreement. If it's a single purpose entity, you could theoretically take promote/fees as deferred comp but not sure if you'd want to. If it's a multi-purpose entity, then you'll want to take promote/fees in cash. The entity still receive its pro-rate share of cashflow but then pays the sponsor the respective promote/fees dictated in the "consulting agreement".
I was under the impression you can't actually structure a promote into a TIC. You can try and approximate it by paying higher fees, as you note, but that's not the same thing and will run into the obvious roadblocks when negotiating it with the individual TIC entity owners...
Ozy - I’m really saying the opposite. For simplicity: -Deal needs $100 of equity -TIC owner says they’ll invest $90 (90%) -Sponsor is at $10 (10%) - I’m saying (and I’ve seen this done before in the past), that you sell TIC owner something like 80% instead of 90% for their $90. That way the sponsor is baking in their promote. - My issue is that I can’t figure out how to calculate what % to actually sell the TIC owner based on what the promote on the $90 would look like if it was LP equity.
Are you saying that you can convert a TIC into an LLC/LP later in the hold period? I’ve never heard of that?
Nothing is stopping a TIC from including performance related comp. All I can think of is that some structures require that the comp be paid out and distributed as ordinary income to the GP vs. carried interest.
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