December 14, 2007
I wish to offer the following comments regarding the NAR request for exemption.
The SEC's mandate and mission for greater investor education and increased opportunity for better due diligence practices before actually making the investment is 100% supported by this TIC practitioner. I fail to see however where the investors' decision making would actually be enhanced by this NAR request in its current form i.e.to allow real estate agents to earn an advisory fee from the securities industry's sale of a TIC. The entire notion of an "advisory" fee is disingenous here, because if adopted, in 99% of the cases it would really be a "referral" fee. I would not be opposed to referral fees in the TIC industry per se but this is not the proposal.
Market data will show that less than 1% of all TIC investments are purchased by investors living in the same city where the subject TIC property is located. It stands to reason that the investor's real estate agent is living where they are and not in the subject city. If the proposal is adopted, the real esate agent would be requesting an advisory fee on a property and location that he knows nothing about A real estate agent may be in a position to offer wisdom and experience to a buyer of a TIC if he or she were actually familiar with the subject property or the subject geographical area and in this case may add value, deservant of an advisory fee but this would be in the minority of cases.
If I were an investor contemplating a TIC investment, I may find it useful to supplement my registered rep's professional opinion and due diligence by getting(a) A real estate expert's comments on a property condition report contained in the PPM and (b)A real estate expert's opinion on the appraisal.
Insofar as (b) goes, the fact of the matter is that property appraisals are rarely (if at all) contained in the offering material prepared by program sponsors. Therefore currently, there is little for the expert to opine on. This is something the SEC should be looking at, if it truly wants to improve the due diligence process. As far as (a) is concerned, it would be difficult for a real estate agent to comment on a property condition report without actually visiting the property. So where is this supposed advisory role?
Even if the proposed conditions for a fee were modified to somehow allow agents to receive a true "advisory fee", in my view, it should be mandatory for these agents to assume the normal liability for their opinions,to also be regulated by FINRA and subject as well to the arbitration process, in event of dispute. Where is FINRA's involvement in this proposal?
Some perceptions of this request by NAR or that of the SEC even entertaining this disguised request for referral fees by the NAR may not be complimentary. Some may even have a sense that the SEC has caved in to a lobbying effort. Coming on the wake of CMO scandals and other regulatory deficiencies in the securities marketplace, my opinion is that the SEC definately have bigger fish to fry. The TIC industry to date has not exhibited the same problem issues as other securities. If it ain't broke, don't fix it. On the other hand, if this is a pure money grab-lets call it a "referral" fee. I would actually be in favor of a referral fee because it would likely increase the demand for the product.
Lastly, market forces at play and not the SEC, should settle this issue. It is the American Way to let the market decide and it is respectfully submitted that it already has. There is nothing preventing TIC sponsors from doing 100% pure real estate offerings and some have. A great many more have not and this appears to be the real issue troubling the NAR.