9.24.15: DSTs Replacing TICs as “Crowd Owner” of Choice

The alphabet soup of commercial real estate lending and the capital markets includes the main product itself: CMBS, or Commercial Mortgage-Backed Securities. And more!

Prior to the 2007-2008 economic crises, the preferred structure for borrowing entities in which the owner of the entity consisted of a large group of individuals was the TIC, or “Tenants-in-Common. A TIC is a form of ownership for holding title to real estate with more than one party. The TIC structure generally provides for an investment vehicle that permits participants to enjoy the risks and rewards of real estate ownership without participating in the ongoing management of a property. The TIC marketplace is comprised of sponsors who facilitate the sale of tenant-in-common interests in which unrelated investors each own undivided interest in a property. TIC borrowers actively utilize the CMBS market because of the non-recourse feature of CMBS conduit loans.

More recently, a new structure, a DST, or “Delaware Statutory Trust,” has become popular and may replace the TIC structure on future group transactions. A DST is a separate legal entity created as a trust under the laws of Delaware in which each owner has a “beneficial interest” in the DST for Federal income tax purposes and is treated as owning an undivided fractional interest in the property. On the surface, the structure appears to be similar to the TIC structure, but the DST eliminates a flaw in the TIC structure when it comes to decision-making on behalf of the TIC.

Individual co-investors in a TIC Investment Property structure must vote unanimously on all major investment decisions. It can be impossible to get all of the individual TIC Investment Property co-investors to agree on major decisions. The individual co-investors or beneficiaries in a DST, however, are not permitted to vote. Therefore, concern that a single co-investor or beneficiary might hold up the process is eliminated. Based on this benefit, it is expected that DSTs will be the vehicle of choice for group ownership in the future.

This entry was posted in CMBS, CMBS Securities, Commercial Lending, Commercial Mortgage-Backed Securities, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , , , . Bookmark the permalink.

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