For people that are putting together real estate syndications, the old model that was often used for large-scale syndications was the tenancy-in-common model.
With a tenancy-in-common model you'd have up to 35 co-owners of a property as tenants-in-common owning a property typically pursuant to a tenancy-in-common agreement. However when the recession occurred it became evident that the tenancy-in-common model wasn’t really doable because decision-making often had to be done by unanimous vote. It can be very hard to get unanimous agreement as to leasing a new tenant, or whether or not to refinance with a particular lender, or whether or not to sell the property.
Delaware Statutory Trust Model
These major decisions often caused log jams that made it very difficult for the owners of the property to work together. So a new model was created based in part on the old Illinois land trust. The new model is called a Delaware Statutory Trust. At the top of the ownership pyramid there is a figurehead owner - the trustee of the trust. But within the trust the beneficial owners are deemed to be the owners of the underlying real estate.
The beauty of it is that once the Delaware Statutory Trust is set up and it owns the property and it's got the property stabilized with the leasing in place, the financing in place, then ordinary investors can take their 1031 funds and invest them into the Delaware Statutory Trust where they receive a beneficial ownership interest in the trust. But for tax purposes they are deemed to own a fractional interest in the underlying real estate.
Furthermore the Delaware Statutory Trusts have set up institutional financing that the beneficial owners are not personally liable for. So they get the benefit of institutional debt without the personal liability. So if the property were to be foreclosed they likely would not have any personal liability for deficiency. For older investors that need to offset debt relief - debt that was discharged on their old relinquished property - they are comforted that they are able to defer their gains, take out new debt, but it's not debt that they’re personally liable for.
- 1031 Hotline: If you have questions about deferred sales trust ownership structures, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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