SEC Rules Sale of Tenant in Common (TIC) Interests Must Comply With Securities Law

Luce, Forward, Hamilton & Scripps LLP today announced it, together with PASSCO Companies, LLC, OMNI Brokerage, Inc., and Argus Realty Investors, L.P., just received a no-action letter from the Securities and Exchange Commission (SEC) taking the definitive position that Tenant in Common (TIC) transactions, structured either as a master lease or property management, are considered securities.

As a result of the treatment of TIC interests as securities, it is clear that sponsors of TIC transactions will have to comply with securities laws, particularly with regards to disclosure and investor suitability.

“During the past seven years, there has been much debate in the TIC industry whether a syndicated tenant in common interest could be sold as real estate,” said Luce Forward Partner Darryl Steinhause, who pioneered the legal structure for the syndicated TIC transaction about 14 years ago. “This no-action letter from the SEC makes it clear that syndicated TIC interests are securities – a fact that will have repercussions across the entire TIC industry.”

Luce Forward requested a no-action letter from the SEC approximately three years ago on behalf of PASSCO Companies, LLC, OMNI Brokerage, Inc. and Argus Realty Investors, L.P. The firm sought confirmation from the SEC that TIC transactions could be sold as real estate without complying with securities laws and received the letter from the SEC on Friday, January 16, 2009.

“The no-action letter from the SEC defining TICs as securities will provide unanimity in the TIC industry that will benefit both sponsors and investors in the future,” said Greg Paul, CEO of OMNI Brokerage, Inc. “We expect that outliers operating on a real estate platform will soon fall into rank and that the improved disclosure will allow for a more investor-friendly structure.”

Bill Winn, president of PASSCO Companies, LLC, added, “Our goal in asking the SEC to verify that TICs could be sold as real estate was to explore the concept of expanding the options available to investors and the possible distribution channels. However, knowing these transactions will all be subject to the securities laws will benefit investors because there will be more disclosure and sales to non-accredited investors will be eliminated. In addition, when TICs are sold as securities, investor protection is enhanced because investors can work directly with the sponsor who is actively managing the property.”

A TIC is an ownership structure where two or more persons own undivided interests in a single piece of real property, such as an office or retail building. Through the modern TIC model, small real estate investors have the ability to purchase fractional interests in institutional quality property allowing them to take advantage of the tax free exchange rules under IRC Section 1031 by exchanging currently held real estate for their TIC interests.

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