Tenant-in-Common (TIC) vs. Delaware Statutory Trust (DST) Financing
When syndicating commercial real estate for 1031 tax-deferred exchange investors, sponsors must choose between a Tenant-in-Common (TIC) structure or a Delaware Statutory Trust (DST). Under IRS Revenue Procedure 2002-22, TICs allow up to 35 co-owners who each hold direct undivided fractional fee-simple title and must sign unanimous consents. DSTs, under IRS Revenue Ruling 2004-86, treat beneficial trust interests as real property for 1031 exchanges, utilizing a centralized master lease structure that commercial lenders find vastly easier to underwrite.
Indicative Underwriting Matrix
DSTs are strictly prohibited from refinancing, renegotiating leases, or raising additional equity post-closing under IRS rules.
Why Institutional Lenders Vastly Prefer DSTs Over TICs
In the early 2000s, TIC structures dominated the 1031 exchange syndication market. However, during the 2008 financial crisis, lenders discovered that obtaining unanimous consent from 35 independent TIC co-owners to approve a lease workout or loan modification was nearly impossible, leading to catastrophic foreclosures.
The Delaware Statutory Trust (DST) solved this governance defect. In a DST, the lender issues a single non-recourse loan directly to the trust. Individual passive investors have zero management voting rights, eliminating gridlock and ensuring the master tenant operates the property efficiently.
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
Why do commercial lenders prefer DST financing over Tenant-in-Common (TIC)?
Lenders prefer DST financing because the loan is made to a single trust entity, eliminating the risk of individual co-owner bankruptcy filings and avoiding the requirement for 35 unanimous investor votes for property decisions.
In a DST, the master tenant holds full management authority, providing the lender with unified operational control and streamlined loan administration.
Submit Financing Scenario →Do individual 1031 exchange investors in a DST have to qualify for the commercial mortgage?
No. Individual 1031 exchange investors buying fractional DST interests do not undergo personal credit underwriting, provide tax returns, or sign loan documents.
The commercial mortgage is completely non-recourse to individual investors, with the institutional sponsor providing the required bad-boy carve-out guaranty.
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