On November 9, 2007, the Securities and Exchange Commission (SEC) gave notice that the National Association of Realtors® (NAR) has asked the SEC for an exemption from securities broker/dealer registration. (Release No. 34-56779; File No. S7-26-07). The requested exemption would permit a licensed real estate agent or broker (Agent/Broker) who is predominantly engaged in and has substantial experience in the commercial real estate market, and the real estate brokerage firm with which such Agent/Broker is licensed, to receive compensation for the sale of a TIC Security. On November 9, 2007, the Securities and Exchange Commission (SEC) gave notice that the National Association of Realtors® (NAR) has asked the SEC for an exemption from securities broker/dealer registration. (Release No. 34-56779; File No. S7-26-07). The requested exemption would permit a licensed real estate agent or broker (Agent/Broker) who is predominantly engaged in and has substantial experience in the commercial real estate market, and the real estate brokerage firm with which such Agent/Broker is licensed, to receive compensation for the sale of a TIC Security.
First a little background – what is a TIC transaction? TIC transactions come out of the 1031 exchange arena – in order to defer capital gains taxes on appreciated real estate property, real property investors do a “1031 exchange” and purchase “replacement” real property. But what if the investor wants out of property management but still wants to defer the capital gain by doing a 1031 transaction? This is when a TIC transaction comes into play. The investor would purchase a tenant-in-common interest (TIC) in new real property, enjoying a fractional ownership the new real property with other owner investors. The TIC owners then enter into management agreement for the management of the new real property, thus enabling the TIC owner to own real property, defer capital gain but not be involved in the day-to-day management of the real property.
Because of the multi-ownership structure of the deal, the National Association of Securities Dealers, Inc. (NASD) has considered this a security since the IRS issued guidelines in 2002 on qualifying TIC interests for 1031 exchanges (Rev. Proc. 2002-22). Thus NASD’s position is that in order to sell TIC deals, the broker must be registered with the SEC. NAR takes a different position, wanting the transaction to be classified as a real property rather than security transaction, and has called upon the SEC to settle the issue.
Under NAR’s request, the Agent/Broker would receive a “real estate advisory fee” from a purchaser of an undivided TIC interest in real property that is offered and sold together with other arrangements that cause it to be deemed to be a security under the federal securities laws. The exemption would only apply to “commercial real estate” which includes all real estate categories other than single-family and one- to four-unit residential dwellings, including office, retail, raw land, multifamily (i.e., greater than four dwellings), industrial and others.
The proposed exemption includes numerous conditions on the Agent/Broker, including:
· The Agent/Broker must enter into a written buyer’s agent agreement with the client setting forth aggregate maximum amount of the Real Estate Advisory Fee to be paid by the client to all Agents/Brokers;
· The Agent/Broker may not list or otherwise advertise the availability of TIC Securities or advertise that the Agent/Broker represents clients in connection with the purchase of TIC Securities;
· The Agent/Broker may not negotiate the terms and conditions of the purchase of any TIC Security on behalf of the client with a broker-dealer or sponsor selling a TIC Security or have any power to bind the client in the TIC Security transaction, but may transmit documents and information between the parties and may attend meetings between the Lead Placement Agent, Selling Broker-Dealer, and the sponsor and the client (solely in order to assist the client); and
· The Agent/Broker may not participate in the structuring of a TIC Security investment offered to the client.
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