Client Alert

A No Action Letter issued by the SEC (the “Letter”) to Omni Brokerage, Inc., Argus Realty Investors, L.P., and PASSCO Companies, LLC (the “Issuers”) on January 14, 2009 indicates that the sale of certain undivided tenant in common interests (“TIC Interests”) evidencing joint ownership of real property likely constitutes a sale of securities, and therefore would be subject to the registration and anti-fraud provisions of the Securities Act of 1933 (the “Act”). The SEC had previously been silent as to whether it would treat the sale of TIC Interests as the sale of securities (rather than simply the sale of real estate). The Letter is the first guidance that the SEC has issued directly on the subject.

The TIC Interests that are the subject of the Letter represented arrangements where multiple persons owned undivided interests in parcels of improved income-producing real property. TIC Interests have become a common way to take advantage of the “like-kind” exchanges permitted by Section 1031 of the Internal Revenue Code, as persons may use proceeds from the sale of real property to purchase TIC interests and defer taxes from that sale, provided that certain other requirements are met.

In the Letter, the SEC disagreed with the Issuers' position that the sale of TIC Interests under (i) a long-term master lease structure and (ii) a property management or asset management agreement structure would not be securities, which most commentators agree is a strong indication that the SEC would take the position that such TIC Interests are, in fact, securities. Unfortunately, the SEC did not explain its reasoning in the Letter. Sellers and sponsors of TIC Interests will therefore have to undertake a detailed analysis of the structure of each TIC Interest transaction, the rights afforded to the TIC Interest holders, and other facts and circumstances to determine whether the TIC Interests in a particular transaction will be classified as securities.

If a TIC Interest is deemed to be a security, sellers and sponsors must comply with all of the provisions of the Act in connection with the sale of the TIC Interest, including, but not limited to, (i) securities registration requirements (or the rules and regulations applicable to transactions exempt from registration), and (ii) statutory anti-fraud provisions, which, among other things, require sellers and sponsors to provide potential investors with all material information related to the TIC Interest.

Because state securities laws often define the term “security” differently than the Act and the SEC, sellers and sponsors must also consider whether a TIC Interest constitutes a security in any jurisdiction in which TIC Interests are offered. One state excludes TIC Interests from the definition of a security if certain requirements are met. In at least five states, however, the sale of TIC Interests would likely constitute the sale of securities. One state has already commenced an enforcement action against a seller of TIC Interests. Following the issuance of the Letter, the Department of Finance of the State of Idaho filed a civil suit against a TIC Interests seller for selling unregistered securities through unregistered broker-dealers and allegedly defrauding investors by making material misrepresentations about the TIC Interests and failing to make required disclosures to investors. It is anticipated that other states may take similar action in the future.

As a result of the implications arising from the Letter, sponsors and sellers of TIC Interests should pay careful attention to the securities law implications of such transactions. They may also find themselves in a position where it is advisable to examine previous transactions to identify potential issues with regard to such activities.

If you have questions about TIC Interests or how the SEC’s No Action Letter may impact your company, please contact Kip Johnson or Heather Mallard of the Corporate and Securities Practice Group or Nellie Shipley of the Real Estate Development Practice Group.