What’s the difference between a DST and TIC?
DST & TIC Ownership Structures Explained
1031 Exchange Programs
Finding an individual replacement property within 45 days can be difficult, timing is critical, and no one likes surprises that can delay the exchange and create costly taxable mistakes. A 1031 exchange program provides investors with a choice of replacement properties having professional property managers that work to attempt to meet investment objectives without the hassle of being a landlord. Potential benefits include:
- Ability to defer capital gains tax
- Preservation of asset value increases “earning power”
- Diversification potential across multiple properties
Rather than owning an investment property as an individual, an investor can join a group of investors to invest in a larger replacement property. Two common ownership structures are Delaware Statutory Trusts (DST) and Tenants in Common (TIC), both of which enable investors to:
- Own quality retail commercial property
- Access larger properties with creditworthy tenants
- Obtain pre-arranged financing
- Retire from day-to-day property management
- Obtain services of professional property managers
Delaware Statutory Trusts
What is a Delaware Statutory Trust
A Delaware Statutory Trust, or DST, is a legal entity created under the laws of the state of Delaware. A DST may be used as the structure to acquire 1031 replacement property but must comply with the requirements of IRS Revenue Ruling 2004-86 in order to provide the potential benefits that investors seek in a 1031 exchange. Each owner has a “beneficial interest” in the DST and for federal income tax purposes is treated as owning an undivided fractional interest in the underlying real estate.
Ideal Property Type for a DST
Due to the restrictions and requirements to qualify, the best attributes for a DST are:
- Single-tenant occupancy
- Investment-grade tenants
- Long-term leases to avoid turnover events
- Triple net leases requiring tenants to pay all property expenses
Potential Benefits of the DST Structure
Potential Investor Benefits
- Streamlined application and closing process
- No personal loan or assumption of debt
- Fewer fees and expenses
- Shields investor from personal liability
- No “rogue” investor concerns
- Beneficial interests are more easily transferable
- Provides a defined exit strategy or sale date
IRS Requirements for a DST to Qualify as a Replacement Property
In order for a DST beneficial interest to qualify as replacement property in a 1031 exchange, a DST may not have the power to do any of the following actions, which are known as the “seven deadly sins”:
1. Sell real estate and use the proceeds to acquire new real estate.
2. Renegotiate an existing lease.
3. Enter into a new lease.
4. Renegotiate an existing loan or borrow additional funds.
5. Accept additional capital contributions from existing investors.
6. Invest money of the DST in anything other than short-term government obligations.
7. Make improvements to the real estate other than minor, non-structural modifications and those required by law.
TIC – Tenants in Common
What is Tenancy-In-Common?
In a Tenants in Common (TIC) Program, each investor receives a separate deed evidencing a fractional ownership interest in a larger property. Investors are considered “tenants in common” and typically own their prorated interest in LLCs.
Potential Benefits of the TIC Structure
Potential Investor Benefits
- Deeded title for prorated property ownership
- Expanded choice of property types
- Right to vote on decisions
- Fewer investors generally per property than with a DST
Potential Rep and Broker Dealer Benefits
- Expanded choice of property types for client
- Pre-arranged financing for clients
Differences Between DST & TIC
- Investors own “beneficial interests” in DST
- No individual assumption of debt
- Limits investor liability
- Allows up to 500 beneficiaries
- One trust without individual LLCs
- Trustee or Manager votes – no individual voting
- Potential for multi-property ownership
- Investors receive “deeded” fractional ownership interests in property
- Each TIC must qualify for loan assumption
- Each TIC has a level of personal liability
- Limited to 35 investors per program
- Each TIC has expense of maintaining individual LLC
- Every TIC has right to vote on decisions
- Difficult to achieve multi-property ownership