Michelle Napoli is editor of TIC Monthly, from which this article is excerpted.

Washington, DC—The Securities and Exchange Commission is seeking public comment until Dec. 17 on an exemption request to allow commercial real estate brokers to be compensated for advising clients on securitized TIC investments. With all the input submitted and questions raised so far, it seems reasonable to expect that changes and clarifications will be made before an exemption is granted.

Though the exemption request has been in discussions for quite some time, a formal request was filed Oct. 11 by attorneys on behalf of Washington, DC-based National Association of Realtors, and published for comment by the SEC on Nov. 9. In a nutshell, the exemption request asks that commercial real estate agents be allowed to earn an advisory fee for advising clients on the real estate aspects of a securities TIC investment, without the agent or their brokerage being registered as securities licensees. Doing so, argues the NAR, "is appropriate in the public interest and consistent with the protection of investors."

"A purchaser who acquires a TIC interest acquires an undivided fractional interest in a particular parcel of real estate--and that fact is unchanged by whether the real estate is sold with other arrangements that results in the TIC interest being deemed a security," the NAR's request states. "We believe that the state statutory and regulatory framework implies that many states have made a policy determination that the protection of a purchaser of real estate, including a TIC security, is enhanced when the purchaser receives real estate services from a commercial real estate professional. In comparison, an associated person of a broker-dealer may not be qualified to provide information on the nature and characteristics of comparable real estate unless the person also holds a real estate license. Because of their extensive training and experience in matters relating to the real estate and the predominant role of real estate in a TIC security transaction, NAR believes that commercial real estate professionals would provide valuable guidance and assistance to a purchaser of a TIC security."

As envisioned in the NAR's request, the exemption would be limited to real estate agents with substantial experience in commercial property and who are predominantly engaged in the sales of real estate other than TIC securities. Just how "substantial experience" and "predominantly engaged" are to be defined and quantified remains to be seen, and are two of the particular areas where the SEC has sought comment. The full request and SEC's notice can be found on the SEC's website .

While there has been virtually no comment submitted to the SEC by TIC sponsors, what comments it has received have been a mixed bag. On one hand, real estate agents have for the most part written, not surprisingly, in favor of the exemption. "It's about time that commercial real estate professionals were compensated for their part in TIC transcations. This is good for everybody involved," writes Chris W. Sloan. "The exemption will provide a huge boost to the TIC industry. Getting real estate licensees on board will legitimize the product in the consumer's eyes," writes Patrick Burke. "As it stands now, real estate licensees and securities licensees are unnecessarily at odds." Dave Crane, writes, "It has been my experience that commercial real estate brokers are much better qualified to analyze and advise clients on the merits of TIC investment opportunities than are securities brokers who have little training in real estate transactions."

But on the other hand, comments have been submitted by broker-dealers and registered reps, including some who are dually licensed, many of whom are opposed to the exemption. "I don't believe that most commercial Realtors have the experience and/or the education to work with TIC transactions," wrote a dually licensed individual, Corbin E. Turpin. "If brokers/Realtors want to share in commissions, why can't they simply get a securities license and abide by securities laws and regulations?" asked Burke Dambly in his comments. "Brokers/Realtors already work in an unregulated environment that in no way protects investors. They will only bring their unregulated business practices to the securities world." And another dually licensed individual, Scott Harper, wrote, "I see no benefit to the public in allowing this exemption. The only argument that comes up in favor is that it will help all of us sell more TICs. So what? That's not a good reason to allow for the exemption."

As the saying goes, the devil is likely to be found in the details--and how those details are, from a practical standpoint, applied to real life. Based on comments submitted to the SEC and on conversations TIC Monthly has engaged in with industry sources, among some of the chief areas of questions and concerns are:

As it is described in the NAR's request, commercial real estate agent would be able to discuss specific TIC investments, and even tour TIC properties, with the client before the client has been introduced to a registered rep or BD. The concern is then that as a matter of course, specific TIC properties would be shown to an investor before their accreditation and suitability of an investment has been determined and before a rep has an opportunity to establish a relationship with the client.
In that circumstance, what information has the real estate agent been provided? Would sponsors be able to provide information on an offering to real estate agents without fear of running afoul of prohibitions on general solicitation and without the risk of blowing a Reg D registration exemption? Also, would a real estate agent be aware of only a small number of TIC offerings, say from a sponsor located in their local market, or would they be able to present a client with a full array of TIC investment availabilities?
The NAR's request envisions a mechanism that would allow investors to proceed with a TIC acquisition, even though the rep/BD deemed it not suitable. Though there are a number of questions regarding this, one chief concern is that this could lead real estate agents to "shop around" for reps/BDs with looser suitability determination standards.
How will the real estate advisory fee affect compensation going to the rep/BD? Some have expressed concern over the real estate advisory fee being set and established in the buyer's agent agreement--which as currently contemplated must be signed by the real estate agent and the client before the client has been introduced to a rep. Will it be problematic if the real estate agent and BD/rep didn't have the opportunity to agree to a fee split earlier on? And aside from fees, how will responsibilities and liabilities be split between the real estate agent and the securities brokers?
Another area of concern has to do with the possibility that real estate agents will go directly to sponsors that have their own broker-dealers and cut out other BDs/reps, thus circumventing third-party due diligence reviews.

"There will be many who benefit and there will be a few who don't," says Oschin, COO and EVP of Calabasas, CA-based AFA Financial Group LLC. "If this exemption comes through, in theory there will be a far greater amount of equity entering the industry."

Look for more coverage of exemption request developments and related topics in future issues of TIC Monthly.

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SEC Seeks Comments on Proposed Exemption

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