A tale of a TIC investor turned DST investor
Daily 1031Crowdfunding.com hears of tragic stories from clients as we help them find a solution. An all too common story sounds something like this: Jack completed a 1031 exchange in 2006, purchasing a portion of a $20 million multi-family apartment complex in Chicago as one of 35 Tenant in Common (TIC) owners. In 10 years, Jack had nothing but difficulty with the investment. First, he almost missed his exchange deadline because the loan approval process was delayed after one investor failed to submit proper documentation in a timely manner. Then, because owning property put his personal liability at risk, he had to inconveniently set up a single member LLC that cost him both set-up and annual re-registration fees.In 2009 the property began to lose tenants. Certain decisions to boost property performance were delayed because unanimous owner approval wasn’t granted. The property expenses began to exceed the income and capital calls were made. With the property behind its target gains, selling hadn’t been an optimal option when the expected seven year holding period expired. Then the due date for repaying the loan balance approached. The choice came to sell or refinance, and Jack voted to cut ties with the property and the other owners. He especially wanted to avoid another round of lender approvals. To Jack’s satisfaction, the other owners voted to accept their losses and move on. With a 25% depreciation recapture owed, Jack wanted to complete a 1031 exchange to defer the payment. It wasn’t long after he began looking for potential replacement properties, however, that he became discouraged by the availability of affordable properties. But then we told Jack about Delaware Statutory Trusts (DSTs). While sharing many of the benefits of TICs, including fractional ownership, passive investing, and an ability to invest in higher valued properties, DSTs solve many of the drawbacks Jack had experienced with his TIC investment. Jack learned that DSTs acquire properties as the sole owner on behalf of the beneficiaries. The DST trustee is the sole decision maker, so management decisions aren’t at the mercy of unanimous investor approval. To protect investors from mismanagement, DST governance is bound by a list of rules known as the Seven Deadly Sins. Furthermore, DST investors are protected without having to establish a special purpose entity because the DST maintains sole liability of the property. Another important advantage is that the DST alone qualifies for the loan, so Jack would avoid the entire lending process, with its headaches and risks.Jack was pleased to find a selection of DST properties available to him and promptly identified one with upside potential and a debt-to-value ratio that met the requirements of his exchange. Facilitated by his qualified intermediary, Jack purchased units of beneficial interest in the identified DST immediately upon the sale closing of the TIC property. Within a matter of days his exchange transaction was complete. Without having to qualify for debt or wait on other investors, Jack held direct interest in a healthcare facility in Tucson.
At 1031Crowdfunding.com, we specialize in helping people find solutions quickly. Whether coming from a TIC or another form of commercial real estate, a DST can be a great solution to your 1031 needs.
Ed Fernandez is founder/CEO of 1031 Crowdfunding, LLC based in Orange County, CA. You can contact Mr. Fernandez by email at firstname.lastname@example.org or toll free at (844) 533-1031.