The simmering tension between commercial real estate brokers and securities dealers over tenant-in-common sales may soon fade now that the U.S. Securities and Exchange Commission has published a proposed rule allowing brokers to be compensated for sales of TIC interests. The proposal is getting mixed reviews by industry groups.
A TIC enables investors to purchase a fractional ownership interest in a real estate asset. The SEC has long regarded TIC investments as securities, which means real estate brokers who aren't also licensed to sell securities can't sell TIC interests. The vast majority of TICs, however, are purchased as part of a tax-deferred exchange. Therein lies the conflict. Who should be permitted to sell TIC interests — commercial real estate brokers or securities broker-dealers?
If the SEC finalizes its Nov. 13 proposed rule, both sides will have a role. Commercial brokers would be exempt from securities regulations in the sale of a TIC interest, if certain rules are followed:
Real estate brokers would not be allowed to advertise TIC investments;
Investors must sign an agreement allowing the real estate broker to advise on TIC investments;
Securities broker-dealers would decide if TICs are right for investors;
Investors would pay brokers a consulting fee, but if they purchase a TIC interest, the securities broker-dealer or sponsor could pick up the fee.
The rule's 30-day comment period was scheduled to end in mid-December. The SEC will now review comments and likely issue a final rule by summer 2008, predicts Stephen Burr, an attorney with Foley & Lardner in Boston, who represents TIC sponsors. “The publication of this notice is after a lot of interaction between the National Association of Realtors, the SEC staff, and the TIC industry,” says Burr.
As written, the rule would allow real estate brokers to introduce a property to investors and tour the property before bringing the securities broker-dealer into the picture. But Burr says that runs counter to securities laws, which say first an experienced broker-dealer is supposed to determine the suitability of the investor for an investment. “That's where the controversy will be,” predicts Burr. “Who's doing the preliminary selling, and is it selling or advising?”
Gregory Ellis, director of government and regulatory affairs for the Tenant-in-Common Association based in Indianapolis, says TICA is gathering comments from its members on the proposal. Ellis explains a typical concern: “If an investor goes ahead with a TIC investment after the broker-dealer has said it isn't suitable for the investor, is there any liability for the broker-dealer?”
A. Randal Burch, president of Burch & Co. Inc., a broker-dealer in Kansas City, Mo. and a former regulator for the National Association of Securities Dealers, believes the proposal is well thought out. “The [real estate] trade still has to go through a registered dealer, so we still have to put our compliance eyes on the whole transaction,” says Burch.
Burr expects the SEC to allow commercial brokers to sell TIC interests. “At the end of the day, there will be an exemption granted, and it will be substantially what has been requested.”