By Brian Eliason
Just 7 years ago, $200 million of equity flowed into Tenant-in-Common (TIC) properties — now, that figure tops $3 billion. Why? The IRS got things rolling in 2002 when an IRS ruling provided guidance for TIC properties to be able to qualify as viable 1031 Exchange options — expanding the pool of commercial properties available for this tax-deferred rollover. This, in turn, made the 1031 Exchange more accessible to small, individual investors.
The Basics — TICs and 1031 Exchanges
A 1031 Exchange allows an investor to roll over the capital gain from the sale of one investment property into a “like-kind” investment property and defer the capital gains taxes indefinitely into the future.
A TIC is a form of real estate ownership in which:
- two or more people co-own a property
- ownership shares do not have to be equal
- ownership interests can be inherited
- owners may receive a steady cash flow
- owners are not bothered with the day-to-day hassles of managing the properties
The IRS, by allowing TIC 1031 Exchanges into fractional ownership structures, gave investors the opportunity to pool their proceeds with other investors toward the purchase of larger, more diverse investment properties such as multifamily housing complexes, office buildings, shopping centers or industrial facilities.
NAR Petitions SEC for TIC Compensation
Currently, because the SEC considers most TIC investments to be securities, real estate brokers who aren’t licensed to sell securities cannot sell TIC interests nor accept a fee or commission for advising clients of potential TIC investment opportunities. Since 2004, the National Association of Realtors® (NAR) has been in negotiations with the SEC to define a role for commercial real estate professionals in TIC transactions. In November 2007 the NAR petitioned the SEC for an exemption to its requirements that would allow commercial real estate brokers to receive compensation for TIC transactions under certain circumstances. A ruling is expected in spring or summer of 2008.
Investor protection is central to the NAR’s proposal. The NAR proposed that commercial brokers would be exempt only if:
- the commercial real estate professional is predominantly engaged in and has substantial experience in the sale of commercial real estate
- real estate professionals were not allowed to advertise TIC investments
- investors signed a buyers agent agreement with the real estate professional
- the real estate professional can discuss the TIC security property and arrange for the client to see the property, but must introduce the client to the securities broker-dealer when the investor expresses interest in a TIC investment
- investors pay the real estate advisory fee, but if the investor purchases a TIC interest, the broker-dealer or TIC sponsor may pay the fee
- the broker-dealer decides if the TIC investment is right for the investor and is responsible for the transaction
(Note that these are draft provisions and may change under the final exemption.) In sum, the investor benefits from the experience of both the real estate professional and the securities broker-dealer because each professional’s responsibility is kept within the limits of their professional experience and training.
Benefits to Commercial Brokers
An exemption by the SEC will benefit commercial real estate professionals without burdening them with significant new duties — presenting a TIC opportunity to a client is a natural add-on to the sales process that agents are already engaged in. With a signed buyers-agreement in place, an agent will be able to discuss a TIC property and arrange for a client to inspect the property. Once the client has expressed interest in purchasing a TIC property, the agent “hands off” the client to a broker-dealer and receives an advisory fee for assisting the client in the transaction.
Be Prepared
With the likelihood of the SEC exemption being issued, commercial agents should ask questions and establish networks with broker-dealers and registered representatives now. Agents should do what they can to educate themselves about their responsibilities, the duties of broker-dealers, and the benefits of TIC investments by participating in TIC webinars and training sessions. The Tenant in Common Association (www.ticassoc.org) is also a helpful resource.
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Brian Eliason, Chief Executive Officer and Co-Founder, Eliason, is an expert in commercial real estate law, finance, Sec. 1031 Exchanges, tenant-in-common structures, real estate securities, as well as partnership and corporate taxation. Brian is a Wisconsin licensed real estate broker and also a licensed principal of Eliason Financial Group, LLC, a FINRA member broker-dealer.