A Tenant-In-Common (TIC) is a real estate investment that first became available at the end of the twentieth century. This agreement became popular in 2002 after the IRS established TICs as eligible for Private Letter Rulings in 1031 exchanges. Once a more coherent structure was created for these investments, sponsors and brokers were better able to recruit investors. However, like most investments, this legal agreement is not one hundred percent safe and cannot offer guarantees. When America experienced the Great Recession, it became apparent that TIC investments had a number of pitfalls that investors could fall into.
First of all, TIC investments can only be accepted for 1031 exchanges if they follow the Revenue Procedure 2002-22. This code states that there is a limit of 35 investors per TIC offering. Since only 35 co-investors can sign on to TIC property investments, sponsors are restricted from bringing certain real estate to the market. This also means that investors are forced to buy into a larger share if they want to participate in a certain real estate. TICs can require a steep minimum price, which makes it difficult for smaller investors to get involved.
Delaware Statutory Trust Investments
After brokers and sponsors began to see the limitations of TIC investments, they started to develop an alternative agreement that would still accommodate shared interests between investors for real estate properties. This became known as a Delaware Statutory Trust (DST).
In 2004, the Internal Revenue Service addressed Delaware Statutory Trusts as a qualified replacement in 1031 property exchanges. The difference between a DST investment and a TIC investment is that the first does not require single-member limited liability companies (LLC). Each investor becomes a beneficiary and owns their portion of interest in the investment.
DST brokers admit that the more simplistic structure of a Delaware Statutory Trust avoids the high expenses of single-purpose LLCs and provides ease of operation for investors. Investors no longer face certain liabilities that they would under a Tenant-In-Common investment opportunity.
TIC investments require all participating investors to agree on certain decisions in order to proceed with changes. This can make it very difficult for anything to get done. In a DST investment, however, co-owners are not given voting privileges, which allows the process to run a lot smoother.
DST brokers explain that the Delaware Statutory Trust maintains one hundred percent of the interest in real estate. This system works to revise the complicated nature of TICs in order to focus on a single loan and a single borrower. With a DST investment, there can be as many as 100 investors on one DST offering. This makes it easier for investors to participate in larger, more commercial properties. Since there are more investors sharing the interest, the minimum investment price also drops.
Now that Delaware Statutory Trusts have become widely recognized for their convenience and advantages in 1031 exchanges, investors are starting to choose them over TIC investments. The ability to defer capital gains taxes is an especially attractive feature of a DST investment as well as the option of participating in larger real estate opportunities.
We would like to remind you that even though we have researched this information and believe it to be accurate and true to nature, you should remember that every form of investment, which includes real estate is speculation by its nature. This involves a risk of significant losses. Also, non-publicly traded private placements of securities can be liable to a necessary period of holding. They are designed for investors that are accredited already and will not need a liquid investment.