Tenants in Common (TIC) and Delaware Statutory Trusts (DSTs) are both viable structures to implement multi-owner real estate offerings when completing a 1031 exchange. However, there are several key distinguishing characteristics.
Decision-Making
In the TIC structure, there are IRS requirements that require numerous key decisions from the owner(s), such as:
- Sale of the property
- Refinancing the property
- Or entering into new leases approved by all investors
In a DST, all decision-making responsibility is passed on to the sponsor-affiliated trustee. The ability of the sponsor-affiliated trustee to make these decisions allows for:
- More nimble management
- The elimination of stress, delays, and the potential conflicting desires that can arise when all investors need to unanimously make key decisions
Structural Differences
DSTs and TICs contain some significant structural differences. In the more simplified DST structure, the investor needs only to execute a trust agreement for the DST. Additionally, since the lender will only be making one loan to the DST, it eliminates the need to conduct additional due diligence on each investor.
In the TIC structure, each investor is considered a co-borrower to the loan; therefore, additional due diligence from the lender is likely to be required. Also, investors in a TIC deal typically need to buy their interests in the investment through a special purpose entity. Often this entity has certain legal requirements to be filled, along with dues to be paid on a regular basis.
Years ago, TIC investments were the structure we most often facilitated for multi-owner deals but today, most of the deal offerings we see are structured as DSTs. Chicagoland 1031 Exchange can help you understand and decide which 1031 exchange structure is right for you.
