Sale of Tenant-In-Common Interests Must Comply With Securities Laws

The Securities and Exchange Commission (SEC) recently issued a no-action letter taking the definitive position that Tenant in Common (TIC) transactions, structured either as a master lease or property management, are considered securities. Since the SEC has now stated, in no uncertain times, that these TIC interests are securities, prudent sponsors (any person or entity offering or selling TIC interests) will have to comply with securities laws, particularly with regards to disclosure and investor suitability. This is newsworthy because there has been much debate in the TIC industry over the last seven years as to whether a syndication involving TIC interests could be sold just as real estate or must comply with applicable federal and state securities laws.

TICs have been popular among investors as a way to own their investments. It allows two or more persons to own undivided interests in a single piece of real property. One of the primary benefits of using the TIC ownership structure is that it enables joint venture investors to each make their own decision whether they want to take advantage of the tax free exchange rules under IRC Section 1031 by exchanging currently held real estate for their TIC interests.

This ruling only applies to TICs involving “passive” investors (a passive investor just invests their dollars and are not actively involved in the investment; this is a complicated area and you should consult an attorney before taking any action). This ruling does not apply where all TIC investors are actively involved.

For all TICs involving at least one passive investor, it is now essential to get a solid, clear understanding of how to make sure your deals comply with applicable securities laws.