REAL ESTATE OR SECURITIES?

There is currently some debate among many of those involved in the tenant-in-common industry as to whether a TIC investment should be considered real estate or a security. Though the issues surrounding the debate can become rather complex, the underlying issues framing the debate are quite simple. It is clear that a tenant-in-common investment is, at its most fundamental level, real estate. And, for tax purposes (assuming compliance with Revenue Procedure 2002-22), it is also clear that TICs represent real estate, and not an interest in a partnership or business entity. For purposes of state and federal regulatory oversight and compliance, however, the majority of TIC industry participants have concluded that TICs should be treated as securities.

The most referred-to precedent for treating TICs as securities comes from the 1946 Supreme Court case SEC vs. Howey. In the case, the Supreme Court ruled that a security can be defined as an "investment of money in a common enterprise with an expectation of profit derived primarily from the efforts of others." This definition is clearly broad enough to encompass a wide-array of investments, including, quite possibly, tenant-in-common interests. To date there has been no definitive ruling or guidance on the part of the SEC as to whether or not all TICs should be treated as securities. However, it is clear that most TIC sponsors have chosen to "take the high road" with respect to this issue, and to package, market, and sell their TIC offerings as securities.

What this means for the investor is that most TICs are sold as private placements under Regulation D of the Securities Act of 1933, and are offered only to accredited investors. An accredited investor is generally one who has a net worth of at least $1 million or who has an annual income of $200,000 if filing as a single taxpayer, or $300,000 if filing jointly with his or her spouse. TICs sold as securities are therefore offered to investors only via prospectuses or Private Placement Memorandums which should outline in great detail the offering's relevant facts, figures, and potential risks.

Tenant-in-common investments offered as securities have for investors the advantage of offering full disclosure of the risks surrounding the real estate investment, whereas a stand-alone real estate transaction does not normally provide the same level of disclosure to investors. TICs offered as securities give investors and their tax and legal advisors an opportunity to "look under the hood" of a potential real estate investment to determine if it is suitable for them and their situation. This may give potential investors and their advisors more confidence that a particular TIC property has been adequately "vetted" by the sponsoring real estate company, and that the due diligence performed on the property has been thorough.