PRINT THIS STORY:

CHANGE TEXT SIZE:

TENANCY-IN-COMMON INDUSTRY PREPARES TO SELF-REGULATE

By Donna Mitchell

Times are good for the tenancy-in-common business. The total volume of these transactions could reach $4.1 billion this year, up from $1.7 billion in 2004, according to Salt Lake City-based Omni Brokerage, which specializes in 1031 exchanges, of which TICs are an offshoot.

The popular 1031 exchanges allow sellers to defer capital gains taxes if they can replace property they sell with another property of equal value within a given time frame. If that proves impossible, the seller can use a TIC deal to purchase a stake in a suitable property instead.

With new entrants streaming into this increasingly lucrative market, a group of TIC professionals says it is time for some ethical self-regulation. To that end, they presented a set of standards and guidelines at the annual conference of the Tenant-in-Common Association in Las Vegas in October. Their document lays out 11 recommendations for structuring and marketing TIC deals to keep the industry in step with standard securities industry practices. Given the complexity of TIC deals, these are pre-emptive steps against lawsuits and the heavy hand of the National Association of Securities Dealers or the Securities and Exchange Commission, the creators of the guidelines say.

Currently, the TIC industry is comparatively unregulated, but that could change, say insiders. The NASD has started paying closer attention to these deals, after finding out that some TIC professionals were holding general seminars and promoting deals. This could cause problems, observers say, because securities law stipulates that these deals can be offered only to clients with whom a securities buyer or seller already does business.

The guideline creators say they also want to ensure that investors can make educated decisions about deals. “That has always been the goal of the TIC Association — to make sure we are providing quality programs to protect our investors,” said Patricia A. DelRosso, president of Oakbrook, Ill.-based Inland Real Estate Exchange Corp. and chairwoman of the association’s ethics and standards committee. She is also a member of the panel that drafted the guidelines.

Another goal is to forestall any meddling by other agencies. “We think it’s a good idea,” said Bill Winn, president of Passco Real Estate Enterprises, whose Irvine, Calif.-based real estate investment firm has been a TIC sponsor for over 10 years. “We’re concerned that the industry’s reputation could be tarnished by [new] sponsors who don’t know what to do.”

The document says TIC deals should be treated as securities transactions, and the relationship between TIC investors and sponsors is at the heart of this. In ordinary real estate transactions, the broker simply facilitates the property sale and leaves the owner to sort out the management issues.

“In the real estate world, it is ultimately up to the investor to ask all the right questions,” said DelRosso. But TIC buyers usually want to forget about everyday property management issues and simply collect rent checks after they invest, she says. They rely heavily on the TIC sponsor for advice and information and for making arrangements regarding management and other issues. This relationship is common in the securities industry, which is why the panelists’ recommendations mirror rules and regulations already set out by the NASD and the SEC.

Another issue the document touches upon concerns the appropriate time for a broker-dealer to notify an investor about a deal, which is usually after the broker-dealer’s firm has met its due-diligence requirements.

The document also makes recommendations about the kind of information that should be included in TIC marketing materials.

“There is a gold-rush mentality” motivating many new entrants to the TIC business, says Robert Smith, a registered representative at Brookstreet Securities Corp., an Irvine-based independent broker-dealer firm. “Some internal control has to be brought on as sponsors and brokers try to come in.”