If you’re an investor considering a 1031 exchange in order to defer the Capital Gains Tax and its friends, chances are you’re looking at a Delaware Statutory Trust or a Tenant in Common to take a step back while your passive investment does the work for you. The real question is, which one is best for you? A DST or a TIC?
Please keep in mind that any investment comes with risks. We urge you to work with your Kay Properties representative to help you ascertain if the real estate aligns with your personal investment agenda and needs.
1. The TIC ownership structure can create problems
The ownership structure of a TIC requires unanimous consent for all major decisions (this includes when or if to sell the property, when to refinance, etc.) making it difficult if a rogue investor refuses to follow the group, exposing the rest of the investors to possible risk. If most of the investors want to sell or refinance, it can be a huge problem if one investor refuses to sell.
In contrast, the DST structure places the decision-making in the hands of the Trustee. This person is typically an affiliate of the DST sponsor company that put together the DST offering in the first place. Instead of relying on a group of other investors, a DST lets you rely on an experienced real estate sponsor company that has seasoned professionals trained in acquisitions, asset management, property management, capital markets, dispositions, and all other fields of property investment. We find it easier to trust an experienced professional rather than a scattered group of investors who may or may not have much experience in this arena.
2. A TIC often requires higher minimum investments
The TIC structure only allows 35 investors, making an investor’s minimum investment on the higher end – often $500,000 or more. This means that an investor (depending on his/her exchange size) can often only invest in one or maybe two properties, concentrating the investor’s risk.
A DST on the other hand can typically have up to 499 investors, often which lowers the minimum investment amount to $100,000. This accessible investment amount allows us to diversify our clients’ investments into multiple DST offerings, letting them put their eggs in more baskets, and in our opinion, lowering their risk potential.
3. TIC investments usually take longer to close
Many TIC investments have a closing process that can take from 30 – 60 (or more!) days. This is due to the investors needing to be underwritten by the lender and then having to sign on the loan documents. If you’re an investor doing a 1031 exchange, you’re up against a time crunch that won’t allow you that much time. A 1031 exchange has a 45-day identification and 180-day closing window, meaning that if you don’t get your property replaced in time, you’re going to be dealt with the Capital Gains Tax, depreciation recapture tax and possibly state taxes and/or the Medicare surtax.
However, with a DST, you can typically have your investment closed within 3 – 5 business days. In a DST, investors are not required to sign on the loan documents or be scrutinized and underwritten by a lender. This can be extremely helpful to those needing to identify their property in under 45 days, and then replace it in under 180 days during their 1031 exchange.
But these are just a few reasons why we prefer DSTs to TICs. There are of course a few special circumstances where we believe a TIC can also be beneficial to an investor, in conjunction with DSTs. Either way, we’d be happy to talk with you further on the subject and encourage you to call our representatives at any time!