History of Syndicated Real Estate (Tenant-in-Common and DST Properties)

Table of Contents:

    The early 2000s marked a pivotal era for syndicated real estate, particularly for Tenant-in-Common (TIC) and Delaware Statutory Trust (DST), commonly referred to as DST properties. Leading sponsors and real estate attorneys collaborated with the IRS to establish guidelines ensuring TIC structures would qualify for 1031 Exchange DST transactions. This collaboration resulted in IRS Revenue Procedure 2002-22, a significant milestone for the industry.

    The Rise of Tenant-in-Common (TIC)

    Following the issuance of Rev. Proc. 2002-22, the TIC industry experienced exponential growth. Investors and their advisors relied on this Revenue Procedure to confidently qualify TICs as “like-kind” property for 1031 exchanges. By 2007, the industry peaked, with nearly $4 billion in equity invested. This period marked the height of TIC 1031 properties’ popularity.

    Emergence of Delaware Statutory Trusts (DST)

    Around the same time, the concept of Delaware Statutory Trusts (DST) started gaining traction. In 2004, the IRS issued Revenue Ruling 2004-86, which provided the same level of certainty for DST structures regarding 1031 exchanges. This ruling allowed the use of DSTs to acquire real estate, with beneficial interests in the trust treated as direct interests in replacement property for 1031 exchange purposes. This development was another significant milestone for the syndicated real estate industry, and IRS Revenue Ruling 2004-86 remains a cornerstone for DST properties.

    Impact of the Great Recession

    The Great Recession of 2008 had a profound impact on real estate values across the industry, including TICs. As banks adopted more conservative lending practices, TICs fell out of favor. The TIC structure required banks to review and underwrite each investor’s creditworthiness, which became cumbersome and unattractive for lenders, especially with up to 35 owners involved.

    Conversely, DST properties gained favor because lenders were more willing to underwrite them. In a DST structure, both the property and the sponsor are responsible for loan repayment, offering non-recourse financing to investors. This means investors have no responsibility for the loan principal in the event of default, and there is no need for banks to credit approve individual investors—a significant advantage over investing independently.

    The Resurgence of DST Properties

    Despite a few sponsors occasionally using the TIC structure, the DST model has become the preferred choice, supported by lenders, especially regional banks with long-standing relationships with sponsors. Since the recession, the syndicated real estate industry has steadily rebounded. During the recession, many real estate investors were reluctant to sell properties due to perceived losses from price declines. However, from 2008 to 2011, the TIC and DST industry slowly regained momentum as the market stabilized and investors began selling investment properties again.

    Each year since the Great Recession, more investors have returned to syndicated real estate, driven by the gradual return to economic normalcy. The evolution from TICs to DSTs has shaped the current landscape of DST real estate, making DST properties a viable and attractive option for investors seeking to leverage 1031 DST listings and opportunities for diversification and tax deferral.

    By understanding this history, investors can better appreciate the advantages and developments that have led to the prominence of DST 1031 investments and DST properties for sale in today’s market. This knowledge helps investors make informed decisions when considering 1031 Exchange DST opportunities and exploring the dynamic world of syndicated real estate.