NORTH BAY – “Passive” investors in properties held in a tenant-in-common, or TIC, arrangement may need to comply with state and federal securities laws, according to a new comment by a federal regulator.

TICs have risen in popularity because of the ability to use the IRS code section 1031 tax-deferred option to sell property and exchange the proceeds for an interest in a TIC. The structure also allows investors to own a stake in property without funding the acquisition of the whole property, roughly analogous to buying shares in a real estate investment trust.

The Jan. 14 no-action letter from the U.S. Securities and Exchange Commission may clear up some situation-specific questions lingering for seven years on whether TICs for institutional-grade investments can be sold as real estate or securities. However, the statement doesn’t apply to “active” investors, or those with a direct role in the property.

TIC sponsors Passco Companies and Argus Realty Investors and broker-dealer Omni Brokerage in 2006 asked the commission whether master lease and property management transactions need to be registered as securities.

They wanted to know whether the rules applied to a TIC arrangement in which the sponsor brings in a potentially affiliated long-term master tenant, which will lease the property to other tenants. The other question was about an arrangement in which the tenants in common bring in unaffiliated property and asset managers.

“Based on the facts presented, the Division [of Corporate Finance] disagrees with your view that the proposed offer and sale of undivided tenant-in-common interests pursuant to the master lease transactions and property management transactions (each as defined in your letter) do not involve securities,” wrote senior special counsel Anne Krauskopf.

San Rafael-based real estate attorney and investor coach Jeff Lerman said the commission’s letter doesn’t address smaller-scale TICs, especially the ones that sprung up in San Francisco to get around condominium-conversion restrictions, that don’t use such master leases or property management agreements.

Yet the commission’s opinion, iterated before but not on this level, may help investors who want to recoup money from TICs that deflated in value recently, according to Mr. Lerman. He has a number of clients who invested in institutional-grade TICs.

“One of the most litigated points in TICs is nondisclosure or failure to disclose or not complying with SEC rules,” he said.

A finding of fraud may prevent the sponsor from discharging such claims in bankruptcy, according to Mr. Lerman.

The commission no-action letter is available at