I was talking with a client of mine recently about the Tenant-In-Common (TIC) industry and the difference between securitized and non-securitized TICs. There is plenty of debate over this issue in the industry right now. TICs are sometimes structured as real estate sales and sometimes structured as securities sales.

The big determining factor in whether a TIC is real estate or a security is whether or not it passes the “Howie Test“. The Howie Test, without getting all technical basically says that if the product is expected to produce income or returns through no effort or direction on the part of the investor, the investment is managed by another - it’s a security. This aplies not only to TICs this applies to all investments. (That was a really simplified version so follow the link above if you want more).

The fact is TICs ARE REAL ESTATE. However you package the deal, whatever paperwork you have to fillout, no matter what the disclosures are, at the end of the day you are buying into a building, a structure, an edifice situated on a piece of land and THAT is real estate.

The components of a real estate deal whether you are buying a deeded frational share (TIC) of it or you are buying the whole thing are the same. Considerations include:

• The physical structure of the building and it’s quality, age, etc.
• The location, the location, the location
• The proposed debt to be placed on the building and all the terms associated
• The leases, who is in the building, how long have they been there, when do the leases end/increase
• Fees - whether due dilligence related or broker related there will be fees
• Property taxes, other municipal considerations

These items are specific to real estate. You don’t have all these considerations when you are buying shares in GE or Microsoft.

What is my point?

Real Estate Partners Inc. and seven affiliated entities filed for Chapter 11 protection last week in the U.S. Bankruptcy Court for the Central District of California. CoStar shows Irvine, CA-base Real Estate Partners as owning six multifamily properties in California and Texas.

Of the money raised for these investments 52% went to commissions… You’d think you’d want to know that when you’re investing several hundred thousand or a million dollars or more. Now I’m not saying that what they were offering were TICs, I don’t know what form of ownership they were using to raise the money but the fact is the offerings were structured as securities. Am I saying BOO to securities, no. I’m saying “Do your homework”. When you’re making an investment especially one backed by real estate the transaction should be as transparent as possible. Investigating real estate doesn’t require a Masters in Finance. You should be provided with a clear, concise, transparent prospectus that you can use to make your decision.

All of the TIC properties that we offer through our four national partners are offered as real estate. They are not securities. We will actually fly you to the building that you’re investing in , you can see it with your own eyes. All of the fees, leases, mortgage terms, everything is laid out for you. That is how you invest in real estate.

There are many, many investment opportunites in real estate and more turning up all the time. Be careful. Seek out people who know something about what they’re selling, who know something about real estate. If you’re not an expert in real estate investments seek counsel with someone who is.