Shouldn’t an investor seeking a replacement property be advised about the merits and income potential of the underlying property?

Yes. That’s an element of the client’s risk evaluation that real estate licensees are best qualified to provide. Real estate licensees who choose to advise clients about TIC investments might tell the client to, at a minimum, identify the following:

• The Property: Location and date of construction/ improvements, leases and/or subleases, environmental challenges, title encumbrances (if any), tenant financials and operating history, rent rolls, financing documents, current appraisal, property tax records.
• The Asset/Property Managers: Existing manager, recommended asset/property managers, relationship of managers to TIC sponsor, relationship of TIC sponsor
and tenant(s), copies of any existing management agreements.
• The Market: Demographics, market conditions for property class, land use/zoning classification.
• The Sponsor: Its background, potential conflicts of interest, civil suits, bankruptcy, use of investor proceeds, real estate broker of record for acquisition of property, TIC agreement, financial strength and experience.

Can a real estate licensee provide any of this advice?

Experienced and qualified real estate licensees are uniquely positioned to help the client evaluate elements of the TIC investment such as the existing or planned leases, condition of the title, comparables for the type of property and its location and the financing terms of the property. Beyond these fundamental matters, the real estate licensee will need to exercise care to provide advice only on matters within his expertise. In securitized TIC transactions, the real estate licensee and the client will need to agree upon a compensation arrangement for this advice, as the real estate licensee cannot be directly or indirectly compensated by the broker-dealer or TIC sponsor for the client’s purchase of a securitized TIC interest.

What else does the client need to think about?

As with any investment, the client needs to identify his own wants and needs. Some of the factors the client may want to consider include:
• Is the property correctly valued?
• Am I willing to be a co-owner rather than the sole fee owner?
• Am I willing to invest with co-owners who are unknown to me?
• Am I willing to participate in an investment that requires unanimity for such basic decisions as asset/ property managers, financing and leasing?
• Will this investment enable me to diversify my real estate holdings?
• If I should die, what happens to my TIC interest?
• How long am I willing to remain invested in this project?

TIC investments appear to require significant due diligence on the part of the sponsor and the investor. Do these due diligence requirements spill over to the real estate licensee who brings a
client to the TIC marketplace?

Yes and no. Any time a securitized TIC interest is sold, the promoter is required by both state and federal law to provide substantial disclosures and to determine whether the investor meets the so-called “qualified investor” rules of the securities laws. This is generally accomplished by providing a private placement memorandum and other disclosures. (These rules are intended to give the promoter
some confidence that the investor is able to evaluate risk and that the investor can “afford” the risks undertaken.)

If a real estate professional has engaged a client in a securitized TIC transaction, the professional should take care not to provide advice on the securitized aspects of the transaction.

Securities rules do not apply to real estate licensees who participate in the brokerage of non-securitized TICs, or the sponsors who promote them. Nonetheless, any real estate licensee involved in the sale of TIC interests will need to provide competent real estate brokerage services related to TICs, including providing all relevant property disclosures, and may assist the client in determining
whether the TIC investment is a proper choice.

What are some of the risks that a real estate licensee might be exposed to?

Risks can arise and liabilities can attach when there is a mismatch between (1) the expectations of an investor and the performance of the investment and/or (2) failures, errors or omissions on the part of any promoter, advisor or other party involved in the investment process. Should any of these mismatches occur, or should state or federal securities law be violated, then real estate licensees could
be exposed to the claims of investors.

What are the penalties that could attach to the real estate licensee when the securities laws have been violated?

Penalties that may be imposed for securities law violations by real estate licensees include civil or criminal penalties and fines. The harshest civil penalty under the securities law is known as the right of rescission. When rescission is successfully invoked, sponsors and promoters are required to pay back to the investor all the funds that the investor has put into the program. Securities litigation is complex
and costly for all parties. Real estate licensees should note that errors and omissions insurance generally will not cover them in rescission actions related to securities matters. The preceding discussion has been about the investment process and the characterization of an investment as either real estate or securities.

I thought the TIC interest was rooted in tax law?

It’s true that the TIC marketplace arose to satisfy the need to provide diverse investment opportunities for purchasers who seek replacement properties for their like-kind exchanges. The tax rules themselves are quite straightforward. They are readily ascertainable and are found in IRS guidance Revenue Procedure 2002-22. A TIC will either satisfy those tax rules or it won’t. Assuring conformity with the tax requirements is the responsibility of the program sponsor. A TIC investor should be counseled to seek competent legal and financial advice regarding the specific investment and its tax implications.
The marketing, acquisition and operation of a TIC interest, however, are completely outside the tax system. Accordingly, real estate licensees assisting clients in their efforts to find replacement properties need to become well informed about the complexity and opportunities the TIC market presents.

The information contained in this Hot Topic document is not intended
as and does not constitute legal advice, and provides general information only. Before engaging in transactions of the nature described herein, real estate professionals and their clients and customers should consult with legal counsel familiar and experienced with state and federal securities and real estate law.

To contact NAR Commercial Real Estate staff: 888-648-8321. To find
an online version of this publication go to, REALTOR.org/RCA. For a
complete listing of NAR legislative and regulatory initiatives, go to
http://www.realtor.org/government_affairs