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In part three you will discover how to use a tenant-in-common form of ownership to form a nonsecurity for putting small groups of investors together. CREATING A NONSECURITY TRANSACTION When putting a group together, it is important to determine whether it’s a security or a nonsecurity, as defined by both the Howey Test (see SEC v. Howey [1946] 328 U.S. 293) and the Risk Capital Test (see Silver Hills Country Club v. Sobieski [1961] 55 Cal. 2d 811). If the transactions satisfy either test, it will be classified as a security (see People v. Schock [1984] 152 Cal. App. 3rd 379) and you would not be permitted to publicly advertise for investors. A NOVEL WAY TO MARKET A NONSECURITY How can a marketing program be implemented to form a group of investors without running afoul of the securities laws? In order to accomplish this, you must demonstrate that you’re offering professional consulting services. Offer advice, not control. A marketing plan that is designed to accomplish this objective would include your advertising publicly in the newspaper, on television, through direct mail, or through any other media for a “paid” educational seminar. For the best response, place your advertisements two weeks in advance of the actual date of the seminar—with at least two exposures. If you have books, audio and video tapes on related subjects, or if you are trying to get clients for your consulting services, you might want to make it a free seminar. Remember, never advertise for investors! Diligently prepare a meaningful, informative, and educational program, and present it in a skillful manner. Having it approved for continuing education credits by the related professional organizations will help in the marketing. HOW TO FIND INVESTORS Using the seminar, you will be able to tap into the pool of investors who are interested in being informed of future real estate opportunities. You can send property set-up sheets and make property presentations. Also, you will be able to offer your professional services in locating areas of opportunity and analyzing properties. If a number of people are interested in a particular property, a tenant-in-common investment group should be formed (not under your control), to make an offer either to you or through you, if properly licensed. If you are not a real estate licensee and you simply want to sell your position in the property rather than being part of the group, you can legally do so. In this particular case, not having a real estate license could work to your advantage because of various disclosure laws. HOW TO PROTECT YOURSELF To strengthen your position that the transaction is not a security, take only a minority interest in the group. Be sure the group maintains control of the outcome of the investment—not you. All decisions must be strictly those of the group. Make the tenants-in-common group aware that, under no circumstances, are you allowed to manage its affairs. If you do, you could be considered a promoter, subjecting the entire transaction to security laws, giving each investor a built-in insurance policy against all losses they may incur if the investment incurs losses. If you enter into a real estate consultant agreement , limit your activities to those performed by a real estate licensee, not a managing general partner. If ownership is not in your plans but you still want to participate in potential profits, sell the property to the tenants-in-common group, and take back a participating note and deed of trust on the property. As an offset, offer a below-market interest rate and/or accruals. By taking this approach, not only will you save significantly on taxes, but you will also be making a statement of your faith in the property to the buyers. SUMMARY There are definite advantages to group ownership. Probably the most prevalent is economy of scale. The tenants-in-common form of ownership provides a simple, low-cost way for investors to form groups, while maintaining many tax benefits. Depending on your preference, the tenants-in-common group can be formed as a security or a nonsecurity. If classified as a security, no public advertising is permitted unless it is registered as a public offering. Conducting nonsecurity transactions is relatively easy and inexpensive. If a co-ownership group is being formed as a nonsecurity, don’t jeopardize your position by acting as a promoter or general partner. By doing so, you’ll be indemnifying its members against all losses. ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on real estate taxation and investing and has authored four book in these fields. He is the Director of The Center for Real Estate Studies, a real estate research association. To purchase the TIC Agreement CD/ Workbook and to learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com
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