Georgia Attorneys Title Guaranty Fund

Underwriting Bulletin No. 82

July 26, 2002

SUBJECT: Tenancy-in-Common Investment Programs
It has come to the attention of the Home office Underwriting Department that our offices are being approached by promoters of Tenancy-in-Common Investment Programs, and being asked to insure sales to investors. The common thread to these investment programs is that the investors purchase a tenancy-in-common interest in a property (or properties) along with other investors who also are buying tenancy-in-common interests in the same property (or properties). The promoter usually also is involved with a property manager who manages and controls the properties, and pays the rents to the investors after taking out their “management fee.” There are also commonly fees involved in investing in these properties that are paid to the promoters. These transactions pose potential escrow and title risks beyond those in typical transactions.

The promoters of these programs usually represent that:
An investor can defer paying capital gains taxes through use of a tax-deferred exchange if it is structured properly;

The investor can have a passive investment in real estate as opposed to having to manage a property they own;

This program allows investors to invest in and own a part of large commercial properties, which would normally be too expensive for them to own; and

These types of transactions provide a place to put funds in a tax-deferred exchange where the exchanger has not found suitable replacement property.

There are many reasons First American does not look favorably on this type of transaction. They have many of the same attributes and problems we have struggled with over the last twenty (20) or more years with insuring multiple beneficiary mortgages and deeds of trust. There are potential securities law violation problems. The benefits represented by the promoters may not materialize. The IRS has adopted very strict and complicated rules that, if not complied with, may leave the investor without the safe harbor tax shelter. If the IRS rules are complied with, it may be next to impossible for any investor to get out of the investment short of very expensive and protracted litigation. Over selling of the fractional tenant-in-common interests is a very real potential issue. One could not insure any fractional interest without searching the entire project ownership for other fractional interests to make sure that not more than 100% ownership has been sold.

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