Back in the height of the buying frenzy, some multifamily owners referred to tenant-in-common (TIC) deals as a “house of cards.” That house may be falling apart as cap rates rise across the country and $112 million in TIC multifamily real estate faces distress, according to Real Capital Analytics.

Originally, TICs give the everyday person a piece of apartment ownership. A TIC fund manager pools money from individual investors (who are often reinvesting the capital gains from a previous real estate investment) to buy apartment properties. But back in 2005 and 2006, some industry veterans criticized TIC fund managers for over-promising optimistic returns and having little management acumen.

In some cases, they were right. Some high-profile TICs that weren’t involved in multifamily, including Boise, Idaho-based DBSI (which bought properties and flipped them to TICs) and Salem, Ore.-based Sunwest Management, are going through restructuring.

Pierce Ledbetter, CEO of Memphis, Tenn.-based LEDIC Management, a third-party manager that does a lot of work managing distressed properties for banks, thinks some multifamily TICs could end up with companies such as LEDIC. “The larger companies can weather the storm, but groups less structured, like TICs, will have problems,” Ledbetter says. “With TICs, it’s notoriously difficult to raise additional capital to do almost anything.”

Inherently, TICs may be no more likely to run into financial problems than a basic multifamily institutional owner or operator. In fact, many have lower leverage levels and higher reserves. “Most TICs done in 2005, 2006, and 2007 only borrowed at 60 percent loan-to-value. In most cases, they’re better off,” says Jeffrey Hawks, a principal for Denver-based Apartment Realty Advisors.

William White, a partner with San Francisco-based Alexander Partners, a real estate advisory firm that offers TIC services, estimates that 90 percent of the TIC multifamily deals are paying within 15 percent to 20 percent of their original pro forma. Not great numbers, but not bad compared to the office and retail sectors. He also estimates that less than 5 percent of multifamily TICs are currently distressed.

It’s once they find themselves in a hole, however, that it becomes a lot tougher to dig out. “With a TIC structure, raising the cash be an absolute nightmare,” says Larry Stephenson, Bloomington, Minn.-based NorthMarq Capital’s executive vice president. “You have to get all of [the investors] to contribute or buy each other out.”

Hawks agrees. “It’s absolutely 10 times harder for a TIC investment group to add equity of refinance or do anything like that,” he says. “They’re not designed for that.”

For one thing, TICs can have no more than 35 investors. If they’re at that number, they can’t get money from the outside. “If you add more money, you’d have to go to individuals already in there,” he says.

Hawks says most TICs are comprised of people 65 years or older who used money from previous real estate sales to buy into the deals. “They already put their money in, and they’re not deep-pocketed individuals,” Hawks says.

There are things TICs can do, such as converting to a single-entity LLC or REIT. But for that to happen, they’ll lose certain advantages, and they need a good sponsor. “If the sponsor deals with the problem at hand, rather than walk away, the TIC structure does what it’s supposed to,” says Greg Paul, president of Salt Lake City, Utah-based OMNI Brokerage. “But if the sponsor leaves the clean-up to the investors, it’s not a pretty sight.”