TIC Monthly

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TICM: How will the SEC's newly approved Form D andmandated electronic filing affect TIC sponsors, and what do theyneed to know?

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Froling: I was involved in the American BarAssociation's comment letter to the SEC on this, and there was alot of back and forth on Reg D stuff, and some discussion anddissension within various groups as to good things and bad things.I don't think they've published the final rule yet. I've only seenthe press release. The phase-in is going to be in September of '08,so we've got another nine months before it even starts, and it'snot mandatory until March of '09. That gives some period of timefor the states to figure out how they're going to deal with it.Trying to get 50 states to agree on how fees and those kinds ofthings are going to be facilitated is an implementation issue thatneeds to be resolved. What's the purpose of having one-stop filingif you still have to send the fees to the states? I'm interested tosee how the states are going to deal with it, and we're not goingto know that for a period of time.

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If you can do it electronically it makes it much more accessiblefor everybody. So for TIC sponsors, more people are going to knowwhat's out there, because you have to file it and you have to statethe date of first sale. There are very few states right now thatrequire that, and the SEC never did. So now you're going to be ableto know how long things have been out there and you're going tohave kind of a calendar of who's doing what, who's busy, who's gotall these offerings out there. It will provide some information ina readily available format that was not previously availablewithout going down to the SEC and going through their records.

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TICM: So might there be a future TIC Monthly columnreporting new deals out on the market, since that information willbe accessible?

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Froling: I think you're going to find someresistance from the sponsors and the broker-dealers. I know itspublic information, but we still have the issue of generalsolicitation. Putting something like that in your newsletter couldblow the exemption for a sponsor, and that's going to be anissue.

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TICM: But if it's public information and readilyaccessible on the Internet…

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Froling: Everyone can access it. That's whythere's an issue as to what free writing you can do on the form.Because of the way the fields of information are, there is alimited ability to explain certain things. I think for TIC deals,that's not going to be as big a deal but there are lots of Reg. Dofferings that are not quite as straightforward, check-the-box kindof deals. You don't want to be in a position of having misleadinginformation out there, so you have to have the ability to clarifyone of the check-the-box items, but at the same time you don't wantto get into a position where you have a general solicitation issue,and that was a very fine line that they were trying to walk.There's going to be some learning process involved in that, andpeople in the industry are going to have to think about the balancebetween public, readily accessible information and securities lawviolations. It's worth a discussion in the industry.

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TICM: The other big SEC-related topic of course is theNAR exemption request. What are your thoughts on the request andthe many comments the SEC received?

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Froling: My perspective is that this is going tohappen. There may be a few tweaks, but I do not suspect that therewill be a whole lot of changes. And I say that because they've beenin discussions with a lot of people. This is not something the SECdid in a vacuum. This was well-vetted with the various regulatoryfolks, including the state securities folks and Finra. So I don'tsuspect that there's going to be any wholesale changes to what wasput out there.

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If you look at the comments requested by the SEC, they were notfocused on if we should do this. Rather, it was, have we defined"commercial real estate professional" in the right way? This comesout of the division of trading and markets, which regulates thebroker-dealers, not corporation finance, which determines what is asecurity. They're really only answering the question of how can weexempt these people in these limited circumstances from having toregister as a broker-dealer. That is the question: it's not if weshould allow them to get paid commissions. The timing issues thatwere raised by TICA--what information is given to the investors,when it has to be given, when the broker-dealers have to getinvolved--are certainly things that may be tweaked to address someof those concerns, but again I don't think the fundamental 'this iswhat we're going to do' is up for grabs.

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TICM: So it's down to the details and not theconcept?

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Froling: And it's not even a lot of details. Itcould be, how do we define substantial commercial real estateexperience? And it could be, when does the securities broker-dealerhave to be injected into the process? From the real estate people'sperspective, they're giving real estate expertise and doing aproperty tour without having to discuss the issue with a registeredrep is kind of within their purview. When you start doing thein-depth financial analysis that's required when you're asecurities rep, who wants to put their client through that scrutinyuntil they really think that they're going to do something? I cansee both sides of that one. You don't want the deal sold withoutthe registered rep being involved, but the real estate folks aren'tgoing to want all of those things that the registered reps do todetermine whether they're an accredited investor done too soon inthe process to turn them off.

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The other issue big issue that concerns me is the ability towaive the fact that they're not an accredited investor and go intothe deal anyway. That would be the one that might not survive,although it may have been well vetted. You can't waive the issue ifyou're a securities dealer, but if the real estate person broughtthe deal to the securities person and the securities person saysthey're not suitable, could that be colored in any way? Is there adifferent motivation for saying you're not suitable than theobjective fact that you're not accredited or financiallysophisticated? Because you don't want to share your commission?It's an interesting question. That to me is probably the mostinteresting thing that will come out of this: what happens withthat ability to waive. There are a lot of things going on thatcould influence that.

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TICM: Do you think the exemption is workable andeveryone can play in the same sandbox together?

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Froling: I don't think they have a choice. Is itworkable? Yes, but it's going to be very difficult. The securitiesregime is such an odd thing for real estate people to get theirarms around. It's outside the realm of the real estate folks, soit's going to be a process.

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TICM: Do you have any insight to offer as to what theprocess and the potential time frame for the exemption beinggranted might be?

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Froling: It seems to me like this is weeks away,not months or years away. I would not be surprised to see somethingbefore the TICA symposium in March. When they published it, it waspretty much a done deal. There are smart people who have beenworking on this for a long time. The thought is that the SEC iscomfortable with the concept, and the questions they asked in thenotice went more to defining the qualifications for the real estatebrokers who can rely on this exemption.

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