Overview of the 1031 Exchange Process

Five parties participate in a DST/TIC offering acceptable for a 1031 exchange:

  • The Sponsor—a national real estate firm with a track record of acquiring, managing and divesting commercial properties;
  • The Lender—a major institutional lender such as Bank of America, Wells Fargo, etc...
  • The Attorney—typically a large, reputable law firm such as Baker & McKenzie, Luce Forward, Hirschler Fleischer, etc...
  • The Broker/Dealer—a FINRA, SIPC member securities brokerage;
  • The Investor—an accredited individual, partnership, LLC, S corporation, and/or C corporation.

The Five Steps in a DST/TIC offering

STEP 1: Sponsor Due Diligence

The sponsor searches the national real estate market looking for the most attractive investment-grade properties. They conduct a significant due diligence process for each potential property. If satisfied with the results of the due diligence, the sponsor acquires or contracts to purchase the property and the offering is initiated.

STEP 2: Arrangement for Debt Financing

Once the sponsor identifies a property for acquisition, the sponsor will arrange non-recourse debt financing with a major lender at competitively low institutional interest rates. The lender will also perform due diligence on the property. The loan is made in whole to the sponsor, and eventually assumed by the investors as a non-recourse loan according to their proportionate share of the offering. Loan repayments will be made by either the property manager or the sponsor (the asset manager).

STEP 3: Preparation of the Private Placement Memorandum

Once the debt side of the offering is negotiated, the sponsor will then structure the equity side of the acquisition through a private placement offering. Such private placement offerings require the sponsor to retain a major law firm to write a Private Placement Memorandum (PPM) disclosing all risks and material facts related to the offering.

STEP 4: Signing of Selling Agreement

Once the PPM has been prepared, the PPM together with all information used in the underwriting of the offering is presented to a FINRA member securities broker dealer. Adding an additional layer of protection to the investor, the brokerage conducts their own due diligence study on the sponsor and the property before signing a selling agreement.

STEP 5: Presentation to Prospective Investor

Once the selling agreement is signed by the broker dealer, the offering may be presented to prospective investors by licensed registered representatives of the broker dealer.