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| TO: State Association Executives/Government Affairs Directors FROM: James Marrelli, Vice President for Commercial Real Estate Joseph Ventrone, Managing Director for Regulatory and Industry Relations RE: NAR Urges Engagement with Real Estate Regulators on the Regulation of Tenant in Common Interests DATE: December 1, 2006 OVERVIEW: The Tenant in Common (TIC) marketplace has been growing exponentially, while the transactions have become increasingly complex. Over the past several months, numerous states have issued warnings that securities laws apply to many of these transactions, while it appears that state real estate regulators have yet to become active in enforcing the requirement to comply with state real estate laws when TIC securities are sold. At the NAR Annual Convention in New Orleans, the Board of Directors approved the following statement of policy regarding Tenant in Common transactions: That NAR expeditiously provide educational assistance and other support to state associations as they work with state real estate regulators to assure that the interests of real estate licensees and real estate buyers and sellers are protected in the emerging Tenant in Common marketplace. Rationale: The sale of Tenant in Common interests are fundamentally real estate transactions and as such NAR believes that consumers are best served by having the opportunity to use and rely on the expertise of real estate professionals, REALTORS®, and the protections of state real estate laws. Over the past several years Tenant in Common transactions have grown both in complexity and in volume. Tenant in Common securities has accounted for much of that growth raising concerns that securities broker dealers may be brokering TIC securities without a real estate license. This rapid growth prompted many state securities enforcement agencies to issue notices that clarify that TIC securities are subject to state securities laws. As a result numerous state associations have contacted NAR staff seeking counsel on how TIC securities should be regulated. AT ISSUE: Because of the rapid growth of the industry, and because of the complex nature of many of these transactions, NAR believes that there is a need to educate state real estate regulators about the TIC industry, and to encourage their active enforcement of state real estate laws to these transactions. Based on a survey of state real estate laws that NAR conducted through its outside counsel, not fewer than 38 to 42 state real estate license laws cover TICs as real estate transactions. While securities regulators appear to be more assertive in applying securities laws to most TIC transactions, there is little or no indication that state real estate regulatory bodies are doing so likewise with respect to the laws within their jurisdiction, and it appears that no real estate licensing body has brought an enforcement action against a securities broker dealer for selling a TIC security without a real estate license. Both the North American Securities Administrators Association and the Association of Real Estate License Law Officials have formed work groups on how TICs should be regulated at the state level. It is hoped that these work groups will work together to develop a common set of principles to aid in crafting regulations. DISCUSSION: Tenant in Common transactions have become increasingly popular for real estate owners looking to complete a 1031 tax deferred exchange into an arrangement that can both maximize the diversity of real estate holdings, while limiting the day to day responsibilities of direct ownership. TICs are organized and sold in the following ways: As a simple real estate transaction where several buyers join to purchase a property and oversee its management. As a complex real estate transaction where a sponsor acquires a property, assembles a group of buyers, sets up a management structure, then exits the management of the property and transfers that responsibility to the buyers. In some cases the sponsor may retain an interest in the property. As a securities transaction where the sponsor acquires a property, attracts investors through a broker dealer network and provides for ongoing operation of the property, either through a third party or by retaining control of the management of the property. Most of the growth in the TIC market place has occurred in this area – where both real estate and, in most cases, securities laws apply. The rapid growth of the securitized TIC market is driven in large part by a 2002 IRS ruling that clarified the circumstances by which TICs may be used in 1031 tax-deferred like-kind exchanges. Though a security, securitized TICs are structured to meet the IRS’s criteria for 1031 tax-deferred like-kind real estate exchanges. IMPACT ON REALTORS®: The motion adopted by NAR’s Board of Directors is meant to educate, encourage and assist state associations in helping state real estate regulators increase oversight of the TIC securities marketplace to ensure that practitioners engaged in such transactions are properly licensed. In the coming months, NAR will develop an information kit that will help state associations educate state regulators and legislators. It should be noted that NAR is still in on-going discussions with the Securities and Exchange Commission to develop a clearly defined process by which real estate professionals may participate, and be compensated, in the brokerage of TIC interests and will keep state associations apprised of any developments. In the meantime, an overview of the TIC marketplace and the issues facing real estate professionals can be found at the REALTOR Commercial Alliance homepage in their “Hot Topics” section: http://www.realtor.org/commercial Contact: Mike Mini (mmini@realtors.org) 312-329-8455 or Tom Heinemann (theinemann@realtors.org) or 202-383-1090 |
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