GlobeSt.com EXCLUSIVE: Standards, Awareness Are Issues as TICs Blossom

SALT LAKE CITY-According to the experts speaking at Day Two of the TIC Real Estate Symposium here, more than $850 million was invested in TICs last year and continued growth is expected in 2004. As the more than 450 attending real estate professionals, financial planners, attorneys and lenders learned, last year most of that capital came through four sponsors: Inland Real Estate Exchange Corp., NNN Lease Properties, Passco Real Estate Enterprises Inc. and Wells Real Estate Funds. But with the explosive growth in this industry, concerns were raised about the number of new sponsors entering the field.

"One thing I see is that clients don't always have knowledgeable help," said Tom Dunck, Investment Property Exchange Services. "As a qualified intermediary, we are not the 1031 police."

But Dunck and others agreed that the industry is taking steps toward raising the bar and self-policing. These steps include the formation of the Tenant in Common Association.

"The association's goal is to ensure that the people in today's TIC industry are informed of issues facing the industry and to help maintain a high degree of quality and integrity," said Patricia DelRosso, president Inland Real Estate Exchange Corp. and director of the association.

Yesterday's discussions also centered on Revenue Procedure 2002-22, a set of guidelines issued by the Internal Revenue Service in March 2002. Most of the experts agreed that this signaled a major change in the industry, bringing with it validation by both Wall Street and conduit lenders. "We're now much more concerned with securities-law issues than tax-law issues," said Dan Rosefelt, a tax and securities attorney with Selzer Gurvitch Rabin & Obecny. "On most key issues, we've reached consensus on what is acceptable and what is not."

Agreement wasn't as easy to come by when it came to a discussion on the loans involved in TIC transactions, which in most cases are sold through the CMBS market. The goals of the lenders are much different than the goals of the investor, sponsor and financial planners. In a TIC transaction, the main goal for the investor, and those representing him, is to qualify for a tax-free exchange. That's not so for the lender.

"TICs want it both ways," said Michael Sarkozi, managing director with Bear Stearns. "They want the ownership of real estate, but they don't want the responsibilities of real estate."

The problem is that, even with non-recourse loans, the lender is ultimately holding the TICs responsible if issues such as negligence or even environmental problems occur. Financial planners and their investors argue that even though TICs have their names on the title, they are passive investors and wouldn't have control over these issues and therefore should not be held responsible. "This continues to be a difficult industry from a lender's perspective," added Sarkozi. "I don't see us wavering on this point."

Sarkozi did agree that education is taking place and is positive. Despite financing between 100 and 150 TICs last year, he said he would like to perfect the system and cut down on the time it takes to get a loan approved. Because the exchange business is deadline driven, cutting down on time with the lender and attorneys is always a concern.

"Our sponsors want it faster, cheaper and better, but when something goes wrong ... ." said Deborah Froling, a partner with Hirschler Fleischer.

Froling added that instituting best practices within the industry, including a transition to plain English documents should help the process. "I spend my whole life drafting documents I know nobody ever reads," she added. "I do see vast improvements in the next 12 to 18 months.