When it comes to investing your 1031 exchange proceeds, two popular options that are available are Tenant-in-Common (TIC) and Delaware Statutory Trust (DST). Both have distinct advantages and challenges, so understanding the pros and cons of each can help you make a more informed decision. 

TIC (Tenant-in-Common) 

A Tenant-in-Common (TIC) is a type of ownership structure where multiple investors own a fractional interest in a single piece of real estate. Since each investor holds deed to the property as a tenant in common, the investment qualifies under the like-kind exchange rules of IRS Section 1031.  Each investor has a direct ownership share in the property, allowing them to receive their pro rata share of the property’s income and potential appreciation. TIC structures are often used for 1031 exchanges, enabling investors to defer capital gains taxes by reinvesting their proceeds into like-kind properties.

Pros: 

1. Discretion in Property Selection – One of the main appeals of TIC investments is the flexibility to choose the individual properties that meet your investment criteria. This allows you to focus on specific real estate types that align with your investment goals, whether it’s industrial buildings, multifamily, or retail. It also provides an opportunity to diversify your portfolio, but at your discretion. 
2. Greater Control Over Investment – Depending on the structure of the TIC agreement, some TIC’s can have full voting rights and control of the management and operations of the property. On the other hand, TIC’s can also be passive investors, delegating the day-to-day management and operational control of the property to a manager entity (this is how FNRP’s TIC investments are structured), while remaining compliant with 1031 rules and guidelines. With a TIC, the TICs or the assigned TIC Manager maintain full control of the management decisions. There’s no master lease structure, so you can directly manage or influence the property’s operations, from leasing to eventual sale. If the property needs to re-lease space or make capex improvements, the TICs or the TIC Manager has full discretion to make those decisions. Additionally, there is a wider selection of asset types and risk profiles available, which can be tailored to suit your needs.  
3. Liquidity at Hold Period’s End – When it comes time to exit, TIC owners generally have more liquidity options as compared to a DST. Upon the sale of the property, TICs can either cash out and pay their capital gains taxes or they can choose another investment property and defer their capital gains again. Essentially, you can 1031 exchange through the TIC structure as many times as desired and keep building your investment basis free of capital gains tax.

Cons: 

1. Higher Minimum Investment – TICs investing with a commercial real estate sponsor typically require a higher minimum investment, often around $500,000 or more. This may limit access for smaller investors or those looking to diversify their 1031 exchange proceeds across multiple properties. In addition, in order for a TIC offering to qualify for 1031 exchange purposes, there can be no more than 35 TIC investors, which can have the effect of limiting or restricting the size of a particular transaction or investment.  
2. Limited Diversification – While you have the ability to choose the individual assets you want to invest in, this can be a double-edged sword. TICs are typically limited to single-property investments, so achieving the same level of diversification as a DST or a broader portfolio could be more challenging. 
3. More Lender Underwriting – TIC investments often come with more stringent lender requirements, including the TIC being a direct borrower on a loan. This could mean a little more time spent from the TIC to provide a lender more documentation. 
4. Strict Closing Deadlines – TIC structures often have to balance the challenges of meeting specific 1031 deadlines for property identification (45 days from the sale of your relinquished property) and property closings (180 days from the sale of your relinquished property), adding pressure to complete and fully close on deals in a timely manner. This could be a challenge if you face delays in the acquisition process. 

DST (Delaware Statutory Trust) 

A Delaware Statutory Trust (DST) is a legal entity set up under Delaware state law as a trust to hold real estate on behalf of investors. DSTs allow multiple investors to pool their capital to invest in real estate, with each investor becoming a fractional beneficiary in the trust which holds the property. DSTs are a popular vehicle for 1031 exchanges because they allow investors to diversify their holdings and enjoy a passive, hands-off investment experience.

Pros: 

1. Lower Minimum Investment – DSTs typically have lower minimum investment requirements, often starting at $100,000 or less. This makes it more accessible for investors with smaller capital or those looking to spread their 1031 proceeds across multiple properties. 
2. No Closing Deadline Pressure – Unlike TICs, because you are acquiring a beneficial interest in a trust, DSTs typically don’t face the same challenges that TIC owners do (closing on a property acquisition) in order to meet 1031 deadlines. This reduces the stress of having to rush to identify and close on a replacement property in order to meet 1031 exchange timelines. 
3. Passive Investment – For those who want to be more hands-off, DSTs offer a completely passive investment structure. The sponsor or trustee takes care of everything from property management to eventual sale, allowing you to sit back and collect income. 
4. Diversification Through Multiple Properties – DSTs often pool investors’ funds to acquire multiple properties, offering immediate diversification. Whether you invest in a single asset or a fund of properties, DSTs can help mitigate risk across different real estate sectors and regions. 

Cons: 

• Limited Control – As a DST investor, you have no say in which properties are acquired or how they are managed. While this is great for passive investors, it means you give up control over the investment. 
• Limited Liquidity Options and a Future Taxable Event – DSTs generally have limited liquidity options. Some DSTs promote an UPREIT structure which essentially allows the investor to convert their DST shares into REIT shares/units. Once your equity converts to REIT shares/units, this triggers a taxable event. 
• Longer Hold Periods – DSTs are typically designed to be longer-term investments, often requiring a holding period of 7-10 years. This can be a disadvantage for investors looking for shorter-term opportunities or more flexibility. 
• Misalignment of Interests:  Unlike syndication structures where TICs are common, DST sponsors are typically prohibited from sharing in any potential asset appreciation, sometimes referred to as a “waterfall” or a “promote.” As a result, DST sponsors rely on the upfront fees to make their profit, which translates into the investor paying a high amount of fees at the onset of the investment. While some may view this favorably, this could also lead to a misalignment of interests as it relates to the DST sponsor and the investor because the DST sponsor, unlike a TIC sponsor, does not have a financial interest in the long-term performance of the property. 
• The Risk of the “Seven Deadly Sins” and the Springing Structure – DST’s and their trustees have specific rules they need to follow in order to preserve it’s qualification as a suitable investment for the 1031 exchange. Those rules are as follows:  
  • Once the offering is closed, there can be no future equity contribution to the Delaware Statutory Trust by either current or new co-investors or beneficiaries.  
  • The Trustee of the Delaware Statutory Trust cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any other lender or party.  
  • The Trustee cannot reinvest the proceeds from the sale of its investment real estate.  
  • The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by law.  
  • Any liquid cash held in the Delaware Statutory Trust between distribution dates can only be invested in short-term debt obligations.  
  • While some cash may be kept on reserves to cover necessary repairs or unexpected expenses, any excess cash must be distributed to the co-investors or beneficiaries on a current basis.
  • The Trustee cannot enter into new leases or renegotiate the current leases.

A breach of one of the sins may trigger a springing LLC structure which results in major tax implications for its investors.

Conclusion: Which Is Right for You? 

Choosing between a TIC and a DST will largely depend on your investment goals, risk tolerance, and preference for control. 

• TIC might be a better fit if you want more control over your capital and are willing to take on higher minimum investments. There are more liquidity options upon sale in a TIC structure. 

• DST is a great choice if you prefer a passive investment with a lower minimum investment, are comfortable giving up some control, and are okay with longer hold periods and limited liquidity. It’s important to understand at which point the DST triggers a taxable event. 

Ultimately, both structures allow you to defer capital gains taxes through a 1031 exchange, but the right one for you will depend on your unique needs and preferences. 

This article is for informational purposes only, and is not a recommendation or offer to buy or sell securities. An investment in commercial real estate is speculative and subject to risk, including the risk that all of your investment be lost. All prospective investors should not invest unless such prospective investor can readily bear the consequences of such loss. Any representations or opinions herein concerning the viability, resiliency, and profitability of investing in commercial real estate or engaging in a TIC or DST transaction reflect our belief concerning the representations and may or may not come to be realized. The information herein may contain “forward-looking statements”, which are, by their nature, subject to uncertainties and assumptions. Consequently, actual results may differ from any expectations, projections, assumptions, or predictions made in or based upon any forward-looking statements, which differences could be material and adverse. Prospective investors are cautioned against placing undue reliance on such forward-looking statements.   

 This article is not intended to be, nor should it be construed or used as, an offer to sell, or a solicitation of an offer to buy any securities, which offer may be made only at the time a qualified offeree receives a current Private Placement Memorandum or Confidential Offering Memorandum relating to a proposed investment opportunity.