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

Washington, DC—The National Association of Realtors has sent a letter to state Realtors association executives encouraging them to get more involved in “educating” their state real estate regulators about TIC transactions. While the letter does not expressly state the Washington, DC-based NAR is becoming proactive in encouraging state-level real estate licensing law enforcement actions where the sales of TIC interests are concerned, TIC industry participants from both sides of the securities fence agree it would not be a stretch to read between the lines the association is taking such a stance.

“NAR urges engagement with real estate regulators on the regulation of tenant-in-common interests,” reads the subject line of the Dec. 1 letter. The letter was prompted by the NAR board of directors’ approval, when it met at its annual convention in New Orleans in November, of a statement of policy on the topic. That policy states “that NAR expeditiously provide educational assistance and other support to state associations as they work with state real estate regulators to assure that the interests of real estate licensees and real estate buyers and sellers are protected in the emerging tenant-in-common marketplace.”

The letter also states that “the motion adopted by NAR’s board of directors is meant to educate, encourage and assist state associations in helping state real estate regulators increase oversight of the TIC securities marketplace to ensure that practitioners engaged in such transactions are properly licensed.”

The intent of the letter “is mainly to urge the state associations,” says Tom Heinemann, NAR regulatory policy representative on commercial and real estate tax issues, “to become familiar with the issue, to understand it better and work with their regulators to try to influence” what if any regulation and enforcement activity might take place in the future. The NAR itself does not typically express its policies or opinions directly to state real estate regulators, Heinemann tells TIC Monthly, leaving state and local matters to state and local parties.

Marc Paul, president of Los Angeles-based non-securitized TIC sponsor SCI Real Estate Investments, says he thinks the letter “is definitely the most aggressive stance that I’ve seen the NAR take,” adding that he thinks it is “pretty strongly worded.”

“I am a little concerned that should they press forward and their education becomes more than education, there may be some increase in activity and some action taken” by state real estate regulators, says Shanon Ford, CFO and VP of Renton, WA-based Pacific West Securities Inc., a broker-dealer active in the TIC marketplace.

The NAR letter resurrects the still unresolved issue of if and/or how, in the case of securitized TIC transactions, both real estate and securities licensing laws can be obeyed and whether both real estate and securities licensees can be compensated based on the transactions. Regulators have yet to provide any concrete answers, but the two theoretical outcomes are either a way for real estate and securities licensees to both participate in fees, or dual licensing being required for selling TIC transactions. While there are a few different business models that BDs active in the TIC marketplace might follow, in the case of PacWest, many but not all of its reps are also real estate licensees, notes Ford. His firm is “considering forming a real estate brokerage for exactly this reason,” he adds. But even dual licensing wouldn’t be the final solution, Ford points out, since the issue of portability of a real estate license from one state to another would still have to be resolved.

Heinemann says he is not aware of any state real estate licensing law enforcement actions with regard to TIC interest sales, but he is aware of some states “starting to look into it.”

“We’ve seen a lot of notices from state securities regulators,” Heinemann adds. “We haven’t seen similar notices from real estate regulators. We’d like to see a little bit of that. We think that’s good for the industry.”

“There are a number of states starting to take a look at what approach to take in terms of licensing,” says H. Blaine Walker, chairman of the NAR’s TIC work group, a member of the TIC task force of the Association of Real Estate License Law Officials and chairman of the Utah State Real Estate Commissioners. Based on his work with Arello, he adds, “the general consensus is you need a license to sell.”

“I see ARELLO members starting to take a stronger stance,” Walker adds, “and probably enforce their real estate laws. I think you’ll see the states more active in enforcing real estate” licensing laws.

Walker, as the NAR also has expressed, says he would like to see ARELLO and state real estate regulators work with their counterparts in the securities world. “I would like to see the state regulators work cooperatively,” he says. Meanwhile, the NAR says it continues its discussions with the Securities and Exchange Commission in the hopes they can, as it worded it in its Dec. 1 letter, “develop a clearly defined process by which real estate professionals may participate, and be compensated, in the brokerage of TIC interests.”

The topic of real estate licensing requirements and the sale of TIC investment interests came up during a podcast on TICs that was posted on the National Association of Securities Dealers website in November. Titled “Regulatory Responsibilities in the Sale of TICs,” the podcast mostly explores securities laws and rules as they pertain to securitized TIC transactions and NASD members. But it also notes that “real estate agents may refer customers to broker-dealers that offer 1031 exchanges and TICs. In some states, licensed real estate brokers are required to participate in the transaction. But remember, a member may not pay referral fees to an unregistered entity.”

NASD “members that act as TIC sponsors and pay fees to real estate agents should carefully review SEC and NASD precedent, and if needed consult an attorney,” the podcast continues. The NASD also reminds its members to refer to its Notice to Members 05-18, which addresses TIC transactions. The full podcast and NTM 05-18 can be found on the NASD’s website.

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