What are the differences between DSTs and TICs?

Karlin Conklin: There are more similarities than differences between the two structures. First, both forms of real estate ownership can work with 1031 exchanges, provided the deal is structured properly. Second, both allow investors to have a more hands-off approach to their investment. And finally, both are structured as a security, and only accept funds from accredited investors. How do the returns differ?

Conklin: In most cases, the market and the property will drive returns, not the ownership structure. With that said, an investor should look closely at fees charged by the sponsor coming in, going out and during the hold period, and make sure that all fees are included in the stated projections. If the economic climate changes in a way unforeseen at closing, DST investors have little ability to vote on major decisions. TIC investors typically have voting rights per their percentage ownership interests, so they have a say in decisions such as refinance or sell, thus taking advantage of market conditions. Are DSTs more popular with a specific product type?

Conklin: DSTs have trended more toward commercial centers including office and retail — single tenant buildings are preferred. With a commercial investment you have a lease(s) in place, which could pose a risk depending on the tenant(s). TIC is used for all product types, particularly in the multifamily sector. Is there a minimum investment amount for a TIC?

Conklin: DST structures can have hundreds, or even thousands, of investors, allowing lower minimum investments. Typically, title is held by a single LLC, with the sponsor signing on the loan and making decisions on behalf of the ownership group. With TIC structures, each TIC is on title and has very proscribed involvement and voting rights — therefore, lenders prefer to limit the number of TICs in any ownership group. Most prefer five to six TICs in title, up to a maximum of 10. Both TICs and DSTs are potentially eligible for tax-deferred 1031 exchanges, provided the structure meets IRS guidelines. Who is your typical investor? Does the investor prefer to be hands-off of hands-on?

Conklin: Our typical clients have made a significant portion of their wealth through real estate ownership and the 1031 exchange process. They are moving toward retirement and have a focus on estate planning. We find that our investors prefer to have a vote on choices regarding the property (budgets, capital improvement projects, etc.), but like that we as the sponsor offer third-party property and asset management to reduce the headaches they have experienced with sole ownership.

By: Natalie Dolce,

Published: August 14, 2018