A DST allows investors to own a Beneficial Ownership Interest in a Trust that owns commercial real estate; it is not a real estate partnership. The investor is called a Beneficiary, and receives a proportionate share of the net income, tax deductions, and potential growth. A DST typically limits the number of investors to 499, which is advantageous to investors in cash or with a 1031 exchange, as it can reduce the minimum investment amount. Because DSTs are packaged with pre-arranged non-recourse financing, comprehensive due diligence, and property management already in place, they can simplify the 1031 exchange process for investors.
Tenant-in-Common (TIC)
A TIC is also a co-ownership structure under which an investor may own an undivided fractional interest in an entire property and participate in a proportionate share of the net income, tax shelters, and growth. A TIC owner receives a separate deed and title insurance for his or her percentage interest in the property and the investor has all the same rights and privileges as a single (fee simple) owner. TICs are typically limited to only 35 investors and 1031 exchange investors must qualify individually for financing if debt is required.
Disadvantages of DST and TIC Programs:
1. Market Risk
The potential for loss of property value.
2. Tax Consequences
Adverse consequences in the event of a change of tax status for this type of investment.
3. Illiquid
DST and TIC investments are illiquid by nature.
4. Foreclosure
There is the potential of foreclosure of the property
5. Changes of monthly cash flow
The possibility of reduction or elimination of monthly cash flow distributions.
6. Management, fees and expenses
Loss of management control and the impact of fees and expenses may also adversely affect DST and TIC programs.
There are significant risks associated with 1031 Tenant In Common (TIC) investments. TIC interests are not diversified so investors are more exposed to risk of decline in real estate values. TIC interests are illiquid. Cash flow generated from TIC investments is not guaranteed. Please refer to the offering document for full details before investing. Purchasers will be required to rely on a third party manager to operate the property purchased and will have little control over the compensation paid to the third party manager. The sponsors and manager of the real estate purchased will often have conflicts of interest that can adversely affect an investor. Tenants can default, which can cut off cash flow to investors. The prices for properties being sold in 1031/TIC programs often are not the result of arms length negotiations. TIC interests are not diversified, so investors are more exposed to risk of decline in real estate values of a single building, a single type of building, or a single geographical area. Use of leverage/borrowed funds in some 1031/TIC programs may significantly increase the risk of loss. There are significant tax risks from acquiring property as replacement property in a Section 1031 tax deferred exchange. The use of the TIC investment strategy could lead to a portfolio concentrated in the real estate sector.
The information contained in this material should not be deemed as legal or tax advice. Be sure to consult with your own tax and legal advisors before considering whether these strategies outlined in the presentation will work for you.
There are risks associated with investing in real estate and it is not suitable for all investors. Real estate values may fluctuate based on economic and environmental factors and it is not suitable for all investors. Many real estate investments are illiquid by nature. There is no recognized secondary market and you may be unable to sell your interest prior to liquidation.
Advantages of DST and TIC Programs
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For a minimum investment that may be as low as $100,000, you can participate as an owner of high quality commercial property.2. Monthly Cash Flow, Build Up of Equity
Cash flow is typically paid monthly. The amount of cash flow can vary as determined by rental activity and other economic factors effecting the real estate market. Ordinarily, a significant amount of the cash paid out is not taxable because of depreciation deductions. Equity build-up is anticipated due to amortization of debt on the property as well as appreciation in value.3. Relief from Management
Landlords and land owners will appreciate professional management, which is typically a national real estate company that has an extensive track record in all phases of property acquisition and management.4. Non-Recourse Financing
Ordinarily, the loan is non-recourse. (no personal guarantee required)5. Optimize the Amount of Debt and Equity
There is greater flexibility in locating a replacement property that will op timize the amount of debt and equity required. This is important for a number of reasons, including the ability to avoid taxable “boot”.6. Substantial Due Diligence is Already Completed
Traditional real estate transactions operate under the premise of “Buyer Beware”. Securitized real estate undergoes several layers of transparent due diligence before it is offered to an investor.7. Timely Closing on Replacement Property
Exchangers must meet the 45 day identification period and the 180 day acquisition period. With a TIC or DST, the lease, title, financing and other items are already in place allowing your closing to occur in a timely manner without unexpected delays.8. Asset Backed Investment
The investment is in “bricks and mortar” and is generally uncorrelated to the volatility of the stock market. Real estate investments help diversify portfolios.
Disadvantages of DST and TIC Programs
1. Market Risk
The potential for loss of property value.
2. Tax Consequences
Adverse consequences in the event of a change of tax status for this type of investment.
3. Illiquid
DST and TIC investments are illiquid by nature.
4. Foreclosure
There is the potential of foreclosure of the property
5. Changes of monthly cash flow
The possibility of reduction or elimination of monthly cash flow distributions.
6. Management, fees and expenses
Loss of management control and the impact of fees and expenses may also adversely affect DST and TIC programs.
