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Delaware Statutory Trust vs Tenant in Common

                                                          DST STRUCTURE                                  TIC STRUCTURE

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IRS Provision                                     REV. Rule 2004-86                                 Rev. Proc. 2002-22

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Maximum Number of Investors        Up to 499                                              Up to 35

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Ownership                                        Percentage of Beneficial                       Undivided Tenant in Common

                                                         Ownership in a Trust (DST)                    Interest in Real Property

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Major Decision Approval                 No Voting Rights                                   Equal Voting Rights

                                                                                                                        Requiring Unanimous Consent

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Number of Borrowers                      1 (the DST)                                             Up to 35

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Investor Receives Deed                   No                                                          Yes

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Tenant in Commons have two significant flaws compared to the Delaware Statutory Trust structure. 

 

The first flaw is the limitation on ownership.  With a limit of 35 potential investors, TIC deals are routinely smaller than DST offerings.  For example, if a TIC bought a $100 million apartment building with 50% debt, the average investment would be $1,428,571 based on a full 35 people investing.  Most DST offerings have a minimum cash investment of $25,000 and a minimum 1031 exchange investment of $100,000.

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The second flaw is unanimous consent.  With unanimous consent, 100% of the owners must agree to make changes such as refinancing, selling, or releasing the property.  TIC investments have blown up when the ownership group could not agree to make these changes.  If you have 35 owners, one of them can hold the whole group hostage on the investment.

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TICs do have an advantage over DSTs in that they can be used to buy value add property with the intention to significantly increase value, through renovation, lease-ups, etc.  These deals will potentially have cash calls.

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