SEC Ruling Will Set Future of the TIC (Tenant - in- Common) Industry

Federal Law Matters
If you are a licensed real estate agent, you probably aren’t sitting on the edge of your seat, but you should be. In the last ten years, we’ve witnessed the birth of the tenant-in-common (TIC) industry as a replacement opportunity for 1031 exchanges and the subsequent boom when the IRS publicly gave favorable guidance to these transactions in 2002.

TIC’s are a wonderful tool for real estate investment. They offer investors the ability to own professionally managed, high quality and well located assets that were previously only available to institutions and the ultra-wealthy. Not only are TIC investors attracted to more predictable cash flows, TIC deals often come pre-packaged with debt, management and leasing pre-negotiated. What makes them really work well for 1031 treatment, however, is that an investor can often exactly match their purchase price requirement in completing a 1031 exchange. For example, it might be difficult to find a property that costs exactly $367,489.52, but a buyer may find a TIC property in which they can buy a deeded share for a percentage the works out to be exactly that amount.

Unfortunately, shortly after the boom in the number of TIC offerings, the U.S. Securities Exchange Commission (SEC) and securities brokers weighed in and claimed the TIC territory as their own. Because the SEC can instill fear and uncertainty, what many people understand to be a real estate transaction has in large part shifted away from the real estate industry and onto the plates of the securities brokers.

Tugging on the other side of the rope is the real estate brokerage community and the National Association of Realtors (NAR), who stand behind state laws governing the sale of real estate. TIC interests are, in fact, the purchase of a deed in bricks, mortar, and land. It seems unusual at best that a securities broker, not licensed in real estate, would be selling real estate. And so the battle grounds were laid, real estate agents on one side and securities sales persons on the other; neither it appeared, were willing to compromise.

It now seems, however, the SEC has broken its silence and offered a compromise. On November 9, 2007, the SEC published a notice for public comment that, if implemented, will allow real estate agents to receive a fee from securities brokers in ‘securitized’ tenant-in-common sales transactions. The public comment period ended in December and the SEC is rumored to be assembling the comments and contemplating the myriad of issues brought to light.

The SEC is calling the rule an ‘exemption’, that is, it exempts real estate professionals from being licensed by the SEC (through FINRA) for the purpose of selling TIC securities. This compromise, although not perfect, seems to make sense. Real estate professionals, after all, are certainly the best trained and most experienced people to help investors decipher real estate markets and analytics.

Assuming the SEC determines to move forward, the conditions placed on real estate agents who want to participate will be set. If nothing changes then a few of the rules, generally, will be (1) the agent cannot advertise that he sells TIC securities, (2) the agent has to have a signed representation agreement with the buyer, (3) the agent must have adequate experience in commercial real estate, and (4) the agent must be substantially in the business of commercial real estate other than TICs.

Even with these limitations (and because of them) several issues are giving folks some heartburn. Securities brokers are concerned that the limitation on advertising might be ignored and allow real estate agents to get around SEC rules governing general solicitation in private offerings. Real estate agents are concerned that they will be viewed as being ‘in the business’ of selling TICs and wind up in violation of SEC rules against selling a security without a license. These issues should be resolved in the final version of the exemption, but it remains to be seen how it will happen.

Several people in the industry close to the SEC believe the exemption will be issued in the coming months. And there are many reasons to be excited.

Real estate agents get a win here because they can represent their clients in finding replacement property for their 1031 and can now live without fear of the SEC and get paid for representing their clients. The same people can still get paid from non-securitized TICs.

The Sellers (or Sponsors) also get a win here. They now have access to more sales agents and more investors, which may be a boost of growth for an industry that has appeared to be slowing down.

The clear winner, however, is the investor. TIC transactions can be complicated and are typically sold with all of the financing and management in place. While these are good attributes for the investor, it can often be difficult to decipher the value of the bricks and mortar underneath the marketing materials and the pages of legalese. An experienced real estate professional can cut through the projections, analyze the market, and ultimately help the buyer make the best decision possible in a fast moving industry.

Edited and produced with permission and appreciation from the author, Mr. Todd Phillips, and publisher, Midwest Real Estate News Magazine. Mr. Phillips is Chief Financial Officer of Minneapolis-based Upland Private Equity Group. Midwest Real Estate News Magazine is one of the Country's pre-eminent commercial real estate publications, 'providing useful, unbiased and accurate coverage of the industry and its professionals since 1985'.

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