Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/128835
LEGAL BRIEFS TIC 2.0 DSTs are the future of 1031 real estate investing. a by Steven R. Meier Section 1031 programs were popular in the mid-2000s, principally for high-networth individuals and family trusts and ofces, commanding several billion dollars in invested capital. Tey declined dramatically between 2008 and 2011, dipping to around $100 million in invested capital in 2009. However, Section 1031 programs are beginning to rebound again, growing to roughly $250 million of invested capital in 2012, with potential growth of $1 billion to $3 billion of invested capital per year over the next three years. DST Advantages Prior to 2008, the predominant investment vehicle for Section 1031 programs was the tenancy-in-common, or TIC, program. Now virtually all new Section 1031 programs are being structured as Delaware Statutory 18 May | June | 2013 Trust, or DST, programs, principally for the following reasons. Management and control. In TIC deals, the Internal Revenue Service requires that certain fundamental decisions, such as selling or refnancing the property or entering into lease, management, or brokerage agreements, be made unanimously by investors. During the market collapse of 2008–11, numerous TIC deals were derailed because one or more rogue investors could hold up a deal. In contrast, a DST structure takes all decision-making out of the hands of investors and places it with a sponsor-afliated trustee. Accordingly, in times of crisis, DSTs are more agile decision-makers than TIC programs. Structural simplicity. TIC deals require each investor to form a special purpose entity, usually an LLC, to own the TIC interest and to join a co-ownership agreement (governing relations with other investors), a management agreement or master lease (governing relations with the investment program sponsor), a loan agreement, and a real estate deed. In addition, each investor must execute an environmental indemnity and a "bad boy carve-out" loan guaranty, which provides for personal recourse against the investor if he or she takes certain actions that are in bad faith or that cause a loan default. Tis plethora of arrangements is difcult to digest, costly to maintain, and involves a high level of investor risk. By contrast, a DST investor executes only one document — a trust agreement. Tere are no deeds or loan documents for investors to sign and no environmental or carve-out guaranties for them to execute. Commercial Investment Real Estate Lev Kropotov/Veer As the markets continue their recovery in 2013 and beyond, investors face a more challenging tax environment. Federal capital gains taxes have increased from 15 percent to 20 percent for high-income taxpayers, passive investment income is now subject to a 3.8 percent Medicare tax, and many states are attacking budget shortfalls through higher taxes. Separately, scores of old Section 1031 investment programs — designed to defer taxes pursuant to Section 1031 of the federal tax law — are coming full cycle in the next three to five years. This correlation of events is reinvigorating interest in new tax-deferred investment programs.