Is a Tenant-In-Common investment a security ruled by the Securities and Exchange Commission or simply real estate?

That is the question currently being debated in the Tenant-In-Common 1031 Exchange market. What is the answer? The answer is neither an entirely clear nor simple one.

Most of the industry believes that a Tenant-In-Common investment is a security. Depending on the survey, most studies find that more than 90% of Tenant-In-Common transactions today are securitized and less than 10% are treated as real estate transactions.

Securitized transactions mean that those groups, or individuals, must have a securities registration - either a series 7 or a series 22 and 63. Holding a real estate license alone is not permissible for selling a securitized Tenant-In-Common transaction.

The biggest issue among groups, involved within the industry, is who can receive a commission or referral fee for selling Tenant-In-Common transactions. The FINRA advises making no payment to non-licensed brokers for referrals.

In addition the National Association of Realtors’ 2005 4th quarter publication, distributed by the Realtors Commercial Alliance, states:

• NAR stated that “A real estate investment can become a security when a sponsor seeks capital from individuals who will be engaged in a common enterprise with an expectation of profits based on the efforts of others.”

• NAR warned real estate firms and professionals that the FINRA had explicitly stated that persons solely licensed as real estate agents “may not be compensated by the sponsor or a broker dealer for participation in the marketing and sale of Tenant-In-Common offerings, ether by means of a fee or commission.”

• NAR also emphasized that Real Estate Professionals “should take care not to make Tenant-In-Common investments without careful attention to compliance with securities and real estate laws and regulations. Doing so may trigger enforcement action by the appropriate state regulatory enforcement entities.”

• NAR states: “Penalties that may be imposed for securities law violations by real estate licensees include civil or criminal penalties and fines. The harshest civil penalty under the securities law is known as rescission. When rescission is successfully invoked, sponsors and promoters are required to pay back to the investor all funds the investor has put into the program. Securities litigation is complex and costly for all parties. Real estate licensees should note that errors and omissions insurance (offered by real estate firms) generally will not cover them in rescission actions related to securities matters.”

• NAR also advised Real Estate Professionals that investors should be advised to consider not only the tax aspects of any Tenant-In-Common investment, but also the economics as well including any risks that may be perceived with respect to properties “in which a sponsor may or may not remain engaged in the projects operation.”