If you’re aiming to complete a 1031 exchange, you may be considering an investment structured as a tenancy-in-common (TIC) or a Delaware statutory trust (DST) as a viable option for your replacement property. When might an investor prefer a TIC over a DST, and how does Caliber’s offering fit into the picture?
The Basics: TIC vs. DST
TIC agreements and DSTs are both commonly used in commercial real estate, allowing multiple investors to pool resources to purchase larger properties. By reinvesting the proceeds from the sale of a relinquished property into a TIC or DST, investors can defer capital gains taxes via a 1031 exchange.
A TIC is a form of property ownership in which two or more investors hold an undivided interest in the property. Each investor owns a specific percentage, and co-owners have equal rights to the entire property. A DST allows sellers to exchange their investment property for beneficial interests in a trust, which owns the replacement property. While there are (many) complexities around tax codes and requirements relevant to 1031 exchanges, TICs, and DSTs, this article is focused on investor experience and potential outcomes. Investors and their advisors should have detailed discussions with a knowledgeable team about specific legal and tax matters.
Evaluating the Property Investment Spectrum: Active and Passive Strategies
Let’s consider an example: An investor sells an apartment building in California for $15 million, with $7 million in debt and $8 million in capital gains. They were actively managing the property and want to purchase their next multifamily asset in Arizona to successfully complete a 1031 exchange.
Their path forward spans a spectrum of strategies ranging from active to passive. On the fully active side is the “DIY” approach: The investor can go to Phoenix, meet with several brokers, spell out their parameters for a target multifamily asset—and then be inundated with broker calls.
This approach has two problems:
- It’s a burdensome business. Instead of receiving quarterly reports from a professional manager, the investor is operating everything. In our view, the situation is more akin to a business than an investment.
- The investor is only accessing on-market transactions from brokers. Few brokers have the reach to find off-market or distressed deals—these deals usually go to principals, not brokers. As such, the investor is missing out on opportunities they would see if they chose to invest with a partner who knows the market.
What if the investor opts for the other end of the spectrum, choosing a fully passive strategy? They could exchange into a DST, which is essentially a highly structured product with multiple investors and active professional management. The downside: They’ll likely face significant commissions and administrative costs charged to set up and maintain the DST structure and manage all the investors.
A Different Path: TIC Structure as a Semi-Active Strategy
At Caliber, our 1031 exchange program uses a TIC structure, which we see as a semi-active strategy. Each investor comes into the TIC as their own LLC, and Caliber is always a partner in the TIC as well as the administrative manager. To qualify for the 1031 exchange, the TIC interest owners must have control over big decisions, like renovations and lease price. Interest owners have ultimate decision-making authority—including the ability to fire Caliber, if desired. Caliber does all the professional management work and presents its recommendations to the owners, who act like a board of directors that can approve what has been presented or request changes. Compared to DSTs, TIC fees are simplified and typically more reasonable. After two years in the TIC agreement, the interest owner has the option to roll their equity into Caliber’s Core+ Growth & Income Fund via a 721 exchange.
With Caliber’s full-service 1031 exchange solution, the investor in our example could put $8 million into a TIC with Caliber, who would bring them into an attractive deal they otherwise wouldn’t have seen. For two years after the deal closes, the investor pays fees to Caliber to administer the TIC, and receives quarterly reports. If the investor likes Caliber’s performance, they can then roll their equity—perhaps around $9-10 million at this point—into Caliber’s diversified fund. The investor now has quarterly liquidity (along with the associated tax consequences). As such, the investor can complete the full cycle from DIY active to fully passive without incurring the downsides of a DST along the way.
Caliber acts as a matchmaker between investors with cash and our own deal flow as an on-the-ground manager sourcing high-potential projects. We find the deals and match them with investors based on their timeline and needs, offering low-cost entry to high-quality assets along with white glove service to match debt ratios.
We encourage investors to reach out early to increase the chances of successfully matching their criteria with our pipeline. Contact our team below to learn more.
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About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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