DST vs. TIC: Delaware Statutory Trust vs. Tenant in Common –Which is Right for Your 1031 Exchange?

A 1031 exchange TIC property

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 any responsibility for the day-to-day operations and management of a property. The question many investors have is: “Which is the winner in the Delaware Statutory Trust vs. Tenant in Common 1031 exchange – DST vs.TIC debate?”.

Before looking at the differences between DST and TIC or even 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, in the Delaware Statutory Trust vs. TIC debate, we prefer the DST structure over that of the TIC in certain circumstances for the following reasons:

1No Rogue Investor Concerns – The ownership structure of a 1031 exchange TIC is such that every investor holds title directly and as such, is considered to be a co-owner. So far, so good. However, it also means that every co-owner has a say in all the decisions of the property owned by the TIC, which can be the source of major problems.

To be more precise, the TIC structure requires unanimous consent for all major decisions (when to sell the property, when to refinance the property, etc). Even co-owners that have a minute share or investment in the TIC have the authority to veto a decision that the majority co-owners have consented to. And even critical decisions such as selling a property or ways to raise more capital can be put on hold because of a single investor.

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. Although there are other demerits of a 1031 exchange TIC, it is safe to say that it is a less popular investment vehicle primarily because of the conflicts and administrative delays that can be caused by having several co-borrowers on a single property.

In sharp contrast, 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 1031 exchange 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.

The restriction on the maximum number of investors in a TIC automatically increases the minimum amount of investment required by an investor. Plus it limits the size of the property that can be purchased in a TIC.

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 1031 exchange 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 1031 exchange 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 1031 exchange TICs investment in today’s market. As such, investors have many more options for diversification when choosing from DST offerings.

However consulting a professional who can offer expert advice after evaluating your specific situation would help you make a more informed decision. Contact our team at 1-(855) 899-4597 or info@kpi1031.com so they can recommend the best course of action.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 21 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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