A TIC is a tenant in common form of ownership of real property.  Two or more investors may pool their resources to acquire a piece of real estate and as a TIC choose to own it directly as an undivided fractional interest in the entire property.  However, typically, investors proportionately share with other TIC investors in the risk as well as net income or loss, tax benefits and growth or loss of market value.

TICs have become particularly in demand in the context of tax-deferred exchanges of real property under Section 1031 of the Internal Revenue Code of 1986.  Sale of an investment in real property is a taxable event to the seller.  Under Section 1031, an investor in income-producing or rental property may exchange the investment for another investment in income producing or rental property of equal or greater value and defer payment of capital gains taxes.

In order to get the tax deferred treatment, the investor must acquire an interest in the real property in the exchange, not an interest in a partnership owning the property.  Section 1031 also requires that the replacement asset must be chosen within 45 days and the exchange closed within 180 days of the sale.  The section further requires that there be no more than 35 investors in the TIC.

Let's say you own an apartment house which has appreciated in value over the term of your ownership.  Let's further assume you want to sell the property.  The sale will cause you to incur income taxes on your profit in the sale.  However, if you exchange the property for other real property you can defer paying those taxes.

Sponsors offering "packaged" deals with management and financing in place have come onto the scene.  Because of the difficulty in finding equal and offsetting property for each of several such investors, sponsors offer interests in larger real property holdings to pools of investors in the form of TIC interests.  Typical investments are promoted as eliminating property management challenges for the investor while providing enticing real property tax shelters.

On the national level, TIC exchanges have grown dramatically from approximately $150 million in 2001 to about $2 billion in 2004.  More amazingly, $7.2 billion in TICs were sold in 2005, and well in excess of that amount were sold in 2006.  One transaction in 2005 involved an acquisition of a 30 story office building in Chicago for $174 million. 

This feverish activity may likely be a result of the Internal Revenue Service's issuance in 2002 of new guidelines under which the IRS considers a request for a ruling that a TIC interest in rental real estate is not an interest in a partnership.  The ruling describes the central characteristics of a TIC and sets forth 15 specific conditions that must be met before the IRS may consider issuing a ruling.

The real estate industry has focused TIC marketing, in part, on individuals who may be tired of day-to-day burdens of being landlords or owners of income producing properties.  A cursory review of websites on the internet offering TICs leads you to conclude that all one has to do is make the correct TIC selection, sign up as an investor, and wait for the general appreciation of real estate to kick in to make significant returns.

But wait for a moment before getting an itch to chase after a TIC. TICs by their nature may come within the definition of a security under state and federal law.  In addition, TICs have been identified as securities by the National Association of Securities Dealers.  NASD is the primary private-sector regulator of the American securities industry, including securities brokerage firms, branch offices and securities representatives.

NASD recently issued a notice to its members that TIC interests generally are securities for purposes of federal securities law and NASD rules.  As a result, those members and their associated persons must comply with all applicable NASD rules.  These rules include ones addressing investor suitability, member due diligence as to the terms of the TIC transaction, prohibition of splitting commissions with unregistered persons, supervision of agents involved in TIC offers and recordkeeping.  In particular, an NASD member is prohibited from splitting commissions with a real estate agent not otherwise licensed in a securities capacity through NASD.

The NASD notice further provides that members relying on private offering registration exemption requirements of federal securities law in offering TIC interests must ensure that the manner of offering complies with all applicablerequirements.  These requirements include the prohibition against general solicitation in the securities offering, e.g., public advertising for TIC members.

Securities offerings are regulated by the State of Alaska through the Alaska Securities Act.  ASA requires registration of a securities offering before it can be made in, or from, the state, unless there is an exemption on which the issuer may rely.  For such reliance, all terms of the exemption must first be satisfied.  Some exemptions require a filing with the state prior to making the offer. 

ASA defines a security as including numerous instruments and transactions.  In particular, it includes an investment contract.  That term has been extensively interpreted in Alaska and in other states under corresponding securities laws by administrative action and through court decisions.  The term has a number of variations in interpretation, but in essence it is the investment of money or money's worth in a common enterprise with the expectation of a profit derived solely or substantially through the efforts of others.

A full analysis of the resulting coverage of an investment contract under state and federal law is extensive.  Alaska securities regulators may be taking a closer look at TICs.  As a result, a TIC sponsor in Alaska may have difficulty distinguishing a TIC from the ASA definition of a security. 

The prudent TIC sponsor in Alaska carefully considers the far reaching scope of ASA not only on TICs directly but also ASA protections afforded to TIC investors.  The sponsor must further consider ASA restrictions imposed upon those through whom TIC offers are made.

The prudent prospective TIC investor considers all aspects of a proposed TIC investment.  These aspects include, but are not limited to, commercial terms, risk factors, management, who makes TIC investment decisions, and how long the investor is expected to hold the investment.  The prudent prospective investor must also be aware of rights and protections afforded under ASA.

Otherwise, a TIC may actually become the cause of more than an annoying itch for both the sponsor and the investor.