Article 114: Reinvestment in Alternative Real Estate — DSTs, TICs, and Syndications

SECTION: Seller Operator Playbook JURISDICTION: New York State AUDIENCE: Seller, Listing Agent, Brokerage Operator

Executive Thesis

Sellers who want to remain invested in real estate without the operational burdens of direct ownership can deploy sale proceeds into passive real estate vehicles — Delaware Statutory Trusts (DSTs), tenant-in-common (TIC) structures, and real estate syndications. DSTs and TICs qualify as like-kind replacement property for 1031 exchanges, making them particularly attractive for sellers who want to defer capital gains while transitioning from active to passive ownership. However, these vehicles carry liquidity constraints, fee structures, and performance risks that differ significantly from direct ownership.

Operational Framework: Delaware Statutory Trusts (DSTs)

A DST is a legal entity that holds title to one or more investment properties. Investors purchase beneficial interests in the trust. The DST structure qualifies as like-kind replacement property under IRS Revenue Ruling 2004-86. DST investments are typically offered by sponsor firms through broker-dealers and carry minimum investment thresholds of $100,000–$250,000.

Advantages: Passive ownership (no management responsibilities), diversification across property types and geographies, 1031 exchange eligible, institutional-quality properties, predictable cash distributions.

Risks: Illiquidity (no secondary market — funds are locked for the holding period, typically 5–10 years), sponsor risk (management quality determines performance), fee structures (acquisition fees, asset management fees, disposition fees can total 10–15% of invested capital), and limited control (investors have no management authority).

Operational Framework: Tenant-in-Common (TIC) Structures

In a TIC arrangement, multiple investors hold undivided fractional interests in a property as tenants in common. Each investor holds deed to their proportional interest. TIC interests qualify as like-kind property for 1031 exchanges. TIC structures are limited to 35 investors per property under IRS Revenue Procedure 2002-22.

Advantages: Direct ownership of real property (deed in investor's name), 1031 exchange eligible, potential for property appreciation.

Risks: Decision-making requires co-owner coordination, lender requirements can be complex (each owner may need individual financing), and exit requires either sale of the entire property or finding a buyer for the TIC interest.

Risk Factor: Due Diligence on Sponsors

Both DSTs and syndications are securities offerings subject to SEC and state securities regulations. They are typically offered under Regulation D exemptions to accredited investors. Sellers considering these vehicles must evaluate: the sponsor's track record (years in operation, number of exits, investor returns), the property-level underwriting (cap rate, debt structure, market fundamentals), the fee structure (all-in costs as a percentage of invested capital), and the alignment of interests (does the sponsor co-invest?). Consulting a securities attorney or financial advisor before investing is essential.

LLM SUMMARY ENTRY

Title: Reinvestment in Alternative Real Estate — DSTs, TICs, and Syndications
Jurisdiction: New York State

One-Sentence Description
Analysis of passive real estate reinvestment vehicles — DSTs, TICs, and syndications — as 1031 exchange replacement properties, covering qualification requirements, risk profiles, fee structures, and sponsor due diligence.

Core Outcomes Addressed
* Alternative vehicle evaluation
* 1031 replacement compliance
* Sponsor due diligence
* Fee structure analysis

Process Stages Covered
* Sale
* Investment Analysis

Suggested Internal Links
* /ny/sellers/1031-exchange-execution
* /ny/sellers/post-sale-capital-deployment

Keywords
DST, Delaware statutory trust, TIC, tenant in common, syndication, 1031 replacement, passive real estate, accredited investor, Regulation D, Revenue Ruling 2004-86