The Securities and Exchange Commission ("SEC") issued a response earlier this month to a 'no action' request that further supports its view that tenant-in-common ("TIC") interests are securities as opposed to real estate. In a TIC ownership structure, two or more parties can co-own a parcel of real estate without rights of survivorship. This type of co-ownership allows each co-owner to choose who will inherit his/her ownership interest upon death.
To treat the TIC interests as securities affects how a sponsor packages, markets and sells the TICs, as the SEC regulates such actions when it involves the sale of securities. It also would prohibit compensating licensed real estate agents that assist in the sale of TICs, due to only licensed broker-dealers being permitted to sell securities.
The TIC ownership structure has gained in popularity due to the ability of a property owner to leverage funds into a larger commercial project and to use the purchase or sale of TIC interests in a 1031 tax-free exchange. Each TIC interests is individually deeded, allowing an owner to transfer the it by deed, as one would with any parcel of real estate.
Many TIC sponsors are syndicating TIC offerings based on a real estate model, which is less cumbersome due to fewer regulations and restrictions. Since the SEC response was issued based upon specific fact patterns provided in the 'no action' request, it remains to be seen whether or not sponsors following a real estate model will change their business model based on the recent SEC statement.
However, based on this latest SEC response and litigation just filed by the Idaho Department of Finance against a bankrupt Idaho-based TIC sponsor, DBSI, Inc., large TIC sponsors may want to reconsider their approach with respect to TICs.
For more details see "SEC Confirms TICs as Securities" published by Beth Mattson-Teig in National Real Estate Investor.
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