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
Enhanced scalability and diversification. Because the IRS limits the number of investors in a single TIC program to 35, they are generally limited to properties less than $25 million in total value and require large minimum investments, ofen at least $500,000. DSTs, however, are not subject to an investor limit under the tax law, and under the 2012 JOBS Act, can have up to 2,000 investors. Tus, DSTs can own properties with aggregate value much greater than any TIC deal, while simultaneously accommodating much smaller minimum investments, allowing diversification of investments across multiple DST programs. DST Challenges In certain respects, DST programs are more restrictive than TIC programs. For a DST to qualify for Section 1031 purposes, it must not violate the IRS' "seven deadly sins." Tat means that a DST: (1) cannot receive new capital after an offering is closed; (2) cannot renegotiate or enter into new mortgage debt unless there is a tenant bankruptcy or insolvency; (3) cannot renegotiate any of its property leases or enter into any new leases unless there is a tenant bankruptcy or insolvency; (4) cannot reinvest the proceeds from the sale of its property; (5) cannot redevelop property and, in fact, is limited to performing only normal maintenance and minor nonstructural improvements unless it is required to do more by law; (6) must hold its reserves in short-term debt obligations; and (7) must distribute all cash, other than normal reserves, on a current basis. Tese restrictions caused many investors and broker-dealers to prefer the TIC structure during the mid-2000s. Ironically, many property problems arise from tenant bankruptcies or insolvencies, which a DST can resolve quickly, but a TIC structure can only resolve through a long and uncertain decision process. When issues arise that a DST cannot address due to the seven deadly sins, it converts into an LLC. While this conver- sion inhibits investors' ability to do future Section 1031 transactions, it allows property emergencies to be dealt with appropriately. Given the restrictions on their activities, DSTs are not designed for all property classes. Tey are best suited for properties subject to a long-term lease to a creditworthy tenant on a triple-net basis. Tey can also successfully be used with a master-lease structure to hold multifamily, student and senior housing, hospitality, and self-storage facilities. With markets in full recovery, tax rates on investment income nearly 50 percent higher than they were in the 2000s, and scores of old Section 1031 investment programs coming full cycle, many real estate investors will turn to DST programs to shelter their real estate investment gains. Steven R. Meier is co-chair of Jenner & Block's real estate securities practice and a member of the firm's tax department. Contact him at smeier@jenner.com. WARDCENTERFOR 2EAL %STATE 3TUDIES (IGHER %DUCATION FOR 4ODAYS 2EAL %STATE 0ROFESSIONAL NOW IS THE TIME TO BUY Ultimate Group Sponsor Workshop Gene Trowbridge, CCIM, senior partner at Trowbridge & Taylor LLP, will show you how to attract and pool private money to finance your commercial real estate deals and increase buying power. This 3-day workshop covers how to: s 3TRUCTURE YOUR DEALS INCLUDING WHAT LEGAL ENTITIES TO USE s 2AISE MONEY WHILE FOLLOWING APPLICABLE SECURITIES LAWS s &INANCE; DEALS TO MEET INVESTORS EXPECTATIONS NEXT OFFERINGS START IN CHICAGO: Sept. 16 - 18 To learn more about this course, visit www.ccim.com/education/course/UGS or call (800) 621-7027, ext. 3100. CCIM.com May | June | 2013 19