Choosing a Delaware Statutory Trust over a Tenant in Common (DST vs TIC)
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.
At Kay Properties, we prefer a DST property for the reasons below.
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!
Please visit www.kpi1031.com for more details, call us at 1.855.466.5927 or email firstname.lastname@example.org
Dwight Kay is the Founder and CEO of Kay Properties and Investments, LLC. Dwight is a published author with multiple published white papers and articles on 1031 exchanges, Delaware Statutory Trust (DST) properties and real estate securities. He has been interviewed on local and nationally syndicated radio stations on the matters of 1031 exchanges and replacement properties. He also is the author of the published book “Delaware Statutory Trust (DST) Properties: An Introduction to DST Properties for 1031 Exchange Investors.” Dwight began his career in commercial real estate working for a national commercial real estate brokerage firm focusing on multifamily and commercial real estate.
There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family 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. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.
Diversification does not guarantee returns and does not protect against loss. 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 be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. All photos are representative of the types of properties that Kay Properties has worked with in the past. Investors will not be purchasing an interest in any of the properties depicted unless otherwise noted.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.