TIC Monthly:SEC Exemption for RE Brokers ‘Imminent'

Michelle Napoli is editor of TIC Monthly.

The National Association of Realtors’ request to the Securities and Exchange Commission for an exemption that would allow real estate licensees to be compensated for advising clients on the real estate aspects of securitized TIC investments is “imminent,” Blaine Walker told the audience gathered for a broker-dealer’s forum on Sunday. “We’re hopeful it’s soon,” said Walker, chair of the NAR’s TIC task force and a member of the Association of Real Estate License Law Officials’ TIC task force who has been a party to exemption request discussions with the SEC.

According to Walker, the request outlines the following requirements for such an exemption: the licensee has to be a commercial real estate professional with demonstrable commercial real estate background; the broker has to enter into an agreement with the investor, which would allow the actual payment of the property broker’s fee by the TIC sponsor; the real estate broker would be able to opine only on the real estate aspects of the transaction and cannot advise the client on any securities aspects of the investment; the real estate broker cannot advertise that he or she is a securities TIC specialist; and TICs cannot be the main focus of their business. As pondered by the NAR’s request, Walker said, a securities broker would still have to be involved in the sale of a securitized TIC and indeed both kinds of licensees would work together on securitized transactions where the client also sought the advice of a property broker.

A clear majority of the audience indicated by a showing of hands that they expected the exemption will be a positive development for them and the industry. The BD forum was one of the first discussions to take place during this year’s Tenant-in-Common Association annual conference, which continued through Tuesday in Las Vegas, and the exemption was a topic that garnered attention at other conference sessions, too.

During the TICA board of directors open forum, several active with the association indicated that it is not likely this exemption, or anything else to come from the SEC any time soon, will offer any guidance regarding what makes a TIC a security or not. Rather, Marc Paul, a TICA board member and president of non-securitized sponsor SCI Real Estate Investments, said the exemption will be narrow in scope in addressing the compensation issue. In response to an audience question, Paul said there is no mention in the exemption request as to how fees will be split between real estate and securities licensees.

Paul also indicated he expects many non-securitized sponsors to switch over to the securitized platform if the exemption is granted. Indeed, he later confirmed for TIC Monthly that SCI is prepared to switch to a securitized TIC platform assuming the exemption details what the sponsor expects it to state. “We’ve been fighting for commercial real estate brokers to be able to advise their clients,” Paul said at the open forum.

The TICA board forum also included an update on new and future TICA initiatives, including the evaluation of a possible certification program and a rejuvenation of the association’s political action committee and member political outreach “so we can improve our grassroots lobby,” Patricia DelRosso, TICA president and president of Inland Real Estate Exchange Corp., said. The forum also included reports from the BD forum and similar forums for sponsors and registered reps that took place earlier in the day. Each TIC business constituency identified areas to focus on for industry improvement.

Greater disclosure by TIC investment sponsors, particularly in deal risk analysis and in disclosure of the sponsors’ prior performance track record was stressed during the BD forum. “We need more disclosure,” said one panelist, Jeff Rose of CapWest Securities Inc. “We need to have the sponsors working with us.”

From the audience, Shanon Ford, president of Pacific West Financial Group, urged his fellow BDs to push for greater performance information from TIC sponsors for both deals that have gone full-cycle and current TIC programs. “We’re all foolish if we as BDs don’t demand a meaningful track record in the PPM,” he said. “Everybody’s getting ready for problems that likely are already happening and are going to happen,” he said, adding that despite his firm’s considerable due diligence staff, he feels as though he does not really know how sponsors are performing.

“Disclosure is one of the most important things,” reiterated Snyder Kearney LLC partner Todd Snyder, another audience member and chair of TICA’s due diligence and compliance committee. “There is a wide variation in the amount of disclosure.” TICA’s ethics and standards committee and best practices task force have recommended a number of revisions to TICA’s “Best Practices Guide,” including the recommendation that “information concerning the financial performance of all currently operating and completed offerings previously sponsored by the sponsor of the current offering or any of its affiliates should be included in the PPM,” according to a draft of the recommended changes, which has been distributed to TICA members and conference attendees for their feedback.

It remains to be seen whether, generally speaking, BDs and sponsors will see eye-to-eye on past and current performance disclosure. But best practices was one area identified at the sponsors forum calling for focus, reported William Winn, TICA president-elect and president of Passco Cos. Others included: a need for more sponsor participation in committees and the association in general; timeliness and specific information requests of third-party due diligence reports and evaluating the good and not-so-good in third-party due diligence as well as in managing BD services. And participants at the registered rep forum, reported William Sours, a rep with K-One Investment Co., came to a number of conclusions, including that it’s time to have a more standard methodology for evaluating each deal and whether that is something a rep wants to introduce his or her client to.

Editor’s Note:Look for more coverage of the TICA conference in the November issue of TIC Monthly.