Here is one other question I can never get a satisfactory answer on -- I've been to TIC seminars, and in the presentations they do this big speech on how they can only disclose certain information, that you have to make a certain amount of money and you can only buy TICs from a securities guy... but when I discussed it with my real estate broker in passing, to see what he thought of the idea, he said he could sell me TICs too -- that they are real estate, not securities. So -- are they referring to two different types? Is one better than the other?

Whether or not a TIC property has to be sold by a securities or real estate broker depends on the nature of the investment themselves.
 
Most commonly offered TIC properties are passive investments, meaning that when you buy in, you can rely on third parties to do everything necessary to make the investment profitable. This particular characteristic of the investments is enough to push them into the definition of a "security" in the US, which is very broad (and relatively vague) so the SEC has broad authority to take actions to protect consumers.

There are however firms that structure and sell their TIC investments as pure non-securitized real estate, and these interests are also valid. What you're looking for here is essentially a "should" legal opinion, where in a law firm has structured the TIC product and explained how the nature of the offering makes it fall outside securities laws (ie. it requires active participation on the part of the investors).

You want to be careful of firms however that merely characterize their investments as falling outside of securities law because the underlying asset itself is real estate and haven't addressed the securities issues in any manner; the nature of the asset is not what is controlling, its the packaging/sale to investors that implicates securities laws, and determining whether or not those issues have been adequately addressed should definitely be part of your due diligence.

Here is a link to an article that explains these issues more in depth:

http://www.exeter1031.com/pdfs/Article_1031_exchange_CORE_TIC.pdf

 

This is the $64 question.  Most participants in the TIC world believe that the sale of a TIC interest constitutes the sale of a security.  It is important to differentiate between the definition of ‘security’ in the tax world and ’security’ in the securities world.  For tax purposes you must exchange into real property, not a ‘security’, such as a REIT, partnership, LLC or other similar entity (when properly structured, TIC’s are real property).  In the securities world, the SEC is concerned with how something is sold.  The basic test for whether the sale of something constitutes a security was established over 60 years ago in a US Supreme Court case known as the ‘Howey Case’.  In Howey, the Court set three standards under which the sale of something would be treated as the sale of a security.  The standards are:

• An investment of money has been made by a group of investors in a common enterprise;
• The investors have a reasonable expectation of profit;
• The profits are expected to arise solely, or substantially, from the entrepreneurial efforts of the promoter or third party.

If we look at the sale of a TIC interest, we see that, generally, all three of the standards are present; a group of investors has invested in a common enterprise (the ownership of the property); they certainly have a reasonable expectation of profits and (in most cases) the sole or substantial efforts to obtain those profits will come from the promoter (sponsor).  In fact, it is hard to imagine an example of a TIC transaction where these elements would not be present.  One could argue that a building leased on a long-term, absolute net basis, to a high-credit tenant does not require any effort by a sponsor to obtain the profits.

But, a number of states, including California, have repeatedly stated that entrepreneurial efforts start well before the property is sold to the investors: Who used their expertise to find the property?  Who negotiated its purchase?  Who conducted the due diligence?  Who negotiated the Loan?  Since each of these activities requires entrepreneurial efforts and expertise, the argument has been made that there is no way to sell a TIC interest in states like California outside of a securities structure.

TICA recently issued “Position Statement Number One”, which states (in part): “The Tenant in Common Association (TICA) recognizes that all tenant-in-common (“TIC”) interests are real property.  It is TICA’s position that sales of TIC interests are subject to federal and state security laws when the TIC interests are structured to be sold to unrelated persons, who will not be actively involved in the management of the property, and who have an expectation of income and profits to be derived primarily from the efforts of others.”

At the end of the day, no one has issued a grand proclamation stating definitively that the sale of TIC interests are or are not a security.  For most of us in the business, however, the preponderance of evidence suggests that the process of selling a TIC interest constitutes a securities-related activity.

Jim

Great responses.  I have attached TICA's Position Statement on this issue.