Delaware Statutory Trust vs Tenant in Common

                                                          DST STRUCTURE                                  TIC STRUCTURE

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

Maximum Number of Investors        Up to 499                                              Up to 35

Ownership                                        Percentage of Beneficial                       Undivided Tenant in Common

                                                         Ownership in a Trust (DST)                    Interest in Real Property

Major Decision Approval                 No Voting Rights                                   Equal Voting Rights

                                                                                                                        Requiring Unanimous Consent

Number of Borrowers                      1 (the DST)                                             Up to 35

Investor Receives Deed                   No                                                          Yes

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.

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.

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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1031 Risk Disclosure:

·         There is no guarantee that any strategy will be successful or achieve investment objectives;

·         Potential for property value loss – All real estate investments have the potential to lose value during the life            of the investments;

·         Change of tax status – The income stream and depreciation schedule for any investment property may                  affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral            of capital gains and result in immediate tax liabilities;

·         Potential for foreclosure – All financed real estate investments have potential for foreclosure;

·         Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are                illiquid securities. There is no secondary market for these investments.

·         Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a                        property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of                cash flow distributions;

·         Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may                  outweigh the tax benefits