Five parties participate in a DST/TIC offering for a 1031 exchange:
- Sponsor – a real estate firm with experience in acquiring, managing and divesting commercial properties
- Lender – a major institutional lender
- Attorney – a specialist in 1031 exchanges
- Broker/Dealer – a FINRA, SIPC member securities brokerage
- Investor – an accredited individual, partnership, LLC, S corporation, and/or C corporation.
There are five steps in a DST/TIC offering.
- Sponsor Due Diligence – The sponsor finds the most attractive investment-grade properties and performs extensive due diligence for each. If satisfied with the results, the sponsor acquires or contracts to purchase the property and the offering is initiated.
- Arrangement for Debt Financing – Once a property for acquisition is identified, the sponsor arranges non-recourse debt financing with a major lender, which performs its own due diligence. The loan is made in whole to the sponsor and is assumed by the investors as a non-recourse loan according to their proportionate share of the offering. Loan repayments are made by the property manager or the asset manager, which is usually the sponsor.
- Preparation of the Private Placement Memorandum – Once the debt is negotiated, the sponsor structures the equity component of the acquisition through a private placement offering. This requires the sponsor to retain legal counsel to write a Private Placement Memorandum (PPM) discloses all risks and material facts related to the offering.
- Signing the Selling Agreement – Once the PPM has been prepared, the PPM and all information used in underwriting the offering is presented to a FINRA member securities broker dealer. The brokerage conducts its own due diligence on the sponsor and the property before signing a selling agreement. This adds another layer of protection for the investor.
- Presentation to Prospective Investor – Once the selling agreement is signed by the broker dealer, its licensed, registered representatives can present it to prospective investors.