TICs Sold in Colorado are Securities

Colorado Securities Commissioner, Fred Joseph has determined that TIC interests sold in the state of Colorado by Mile High Capital and Replacement Property Solutions are considered securities rather than real estate.  Replacement Property Solutions was the qualified intermediary arm of Mile High Capital, a real estate investment firm.  Both companies have been closed by the State and their principals indicted for securities fraud.

A TIC (Tenant-In-Common) interest is a small ownership slice of a large property.  In 2002 the IRS ruled that TIC interests qualify for 1031 exchanges.  This means an investor can sell a piece of investment property and buy a partial interest in a large property, such as an office building or an apartment complex.  Prior to the IRS ruling, there was confusion as to whether TICs were treated as real estate, or as partnership interests (which are not allowed as 1031 exchange replacement property).

...The Commissioner alleged that the TIC interests sold by the defendants are ‘securities...’

TIC interests are one of the fastest growing segments of real estate markets as baby boomers discover that they are a way to lock in cash flow, avoid management hassles, and still enjoy future appreciation on a property they would never be able to purchase on their own.  For example: Fred and Sue sell their purple duplex, do a 1031 exchange, and buy a slice of a multimillion dollar office building.  They share in the cash flow of the office building and the potential for appreciation, but they no longer have to manage the property.

One of the ongoing controversies about TICs is the question of whether they are considered real estate or a security.  Don’t misunderstand – the IRS has ruled that, if structured correctly, they qualify as real estate for purposes of replacement property for a 1031 exchange.  But the question is “what license do you need to sell them – a real estate license or a security license?” 

Obviously real estate brokers feel that what is being sold is real estate, which entitles them to a real estate commission (or a referral fee) if one of their clients buys a TIC share as replacement property.  Several large and well known TIC sponsors have taken this approach and pay referral fees under the assumption that the product being sold is real estate.

Securities and investment advisors feel, however, that TICs fall under the SEC definition of a security and require a securities license before you can receive any type of fee from their sale.  A recent NASD directive, as well as comments from SEC officials, indicate that they agree.

Apparently the Colorado Securities Commissioner also agrees.  The February 28, 2006 press release issued by the Colorado Division of Securities announcing the filing of complaints and restraining orders in connection with the Mile High mess, contains the statement that “The Commissioner alleged that the TIC interests offered and sold by defendants are ‘securities’ as defined by the Act.”

While it is not clear whether the Commissioner feels that any TIC offered for sale in the state is subject to state securities law, or just the ones that were offered by Mile High and Replacement Property Solutions, the press release clearly tips the scales towards TICs being defined as a security, at least in Colorado.  And I doubt that Colorado’s Security Commissioner is the only state commissioner that feels this way.