Investors considering a 1031 exchange often look at Delaware Statutory Trust and Tenant in Common Properties as a more passive, hands-off investment vehicle whereby they do not have responsibility for the day-to-day operations and management of a property. The question many investors have is which is the winner in the DST vs. TIC debate.
Before looking at the individual structure of the two investment options, in our opinion, investors must consider the real estate as the most important factor—the quality of the property and if the real estate makes sense.
A DST or TIC is merely a way to hold title to a piece of real estate. Though the structure of the investment may potentially be sound, the real estate can be high risk for a number of reasons. It is of upmost importance that investors work with a group that can help them ascertain if the real estate potentially aligns with their personal investment agenda and needs.
Kay Properties’ due diligence process helps investors to understand the ins and outs of the various properties available in the DST and TIC investment markets. More information can be found here.
At Kay Properties, we prefer the DST structure over the TIC structure in certain circumstances for the following reasons:
1 No Rogue Investor Concerns – The TIC structure requires unanimous consent for all major decisions (when to sell the property, when to refinance the property, etc). There have been situations where the majority of investors are voting to sell the property and yet one investor refuses to sell placing all other investors in jeopardy. Having one investor potentially create this type of anxiety for the entire investment group is problematic to say the least.
The DST structure places the decision making process in the hands of the Trustee who is typically an affiliate of the DST sponsor company that put together the DST offering. For my own personal DST investments, I am much more comfortable with a real estate sponsor company that has experienced professionals in the acquisitions, asset management, property management, capital markets, dispositions, and other fields of real estate making decisions on behalf of the DST property. Leaving the decisions to seasoned real estate professionals, in my mind, is far superior than leaving the decision making to a handful of investors throughout the country who may or may not have the experience necessary to make the right decisions at the right time regarding real estate, and let alone, will typically have a very difficult time in reaching a unanimous consent as to what business plan to pursue for the property.
2 Lower Minimum Investments with the DST vs. TIC – The DST structure can allow for up to 499 investors, which drastically lowers minimum investment amounts as opposed to the TIC, which only allows for 35 investors. The low $100K typical minimum investment in a DST allows us to diversify our clients into multiple offerings at a time, which, in our opinion, can greatly reduce concentration of risk that investors in TICs may face.
For Example: If the property was a $35,000,000 multifamily apartment community with a 50% loan to value, the equity raise would be $17,500,000 and with only 35 investors allowed in a TIC the minimum investment would be $500,000. This creates problems for smaller and larger investors alike due to the lower amount of diversification that they are able to obtain. For an investor with $1,000,000 of equity they would be able to only invest in two TIC properties with $500k minimums as opposed to up to 10 DST investments with $100k minimums. In our opinion, the increased diversification afforded to investors with DST properties is one of the greatest advantages that DSTs have over TICs.
3 Quick Closings – Many TIC investments have a closing process that can take from 30-60+ days due to the investors having to be underwritten by the lender and having to sign on the loan documents. This is compared to the typical 3-5-business day closing process of a DST, which does not require investors to sign on loan documents or be scrutinized and underwritten by a lender. For investors in a 1031 exchange up against the 45-day identification window, having a quick and often painless 3-5-business day DST closing process can be a much better experience than the drawn out TIC closing of 30-60+ days.
These are just three of the reasons why we believe the DST to be the clear winner in the DST vs. TIC debate. However, there are still special situations where we utilize the TIC structure for some of our ultra high net worth investors whereby the DST just will not work for the business plan that the sponsors we work with have for the particular property.
For most of our investors, DST offerings are a much better fit than TIC properties. In our experience, the majority of 1031 exchange fractional ownership offerings are packaged as DSTs as opposed to TICs in today’s market. As such, investors have many more options for diversification when choosing from DST offerings.