Overview of 1031 Exchange Process

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

  1. Sponsor – a real estate firm with experience in acquiring, managing and divesting commercial properties
  2. Lender – a major institutional lender
  3. Attorney – a specialist in 1031 exchanges
  4. Broker/Dealer – a FINRA, SIPC member securities brokerage
  5. Investor – an accredited individual, partnership, LLC, S corporation, and/or C corporation.

 

There are five steps in a DST/TIC offering.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Presentation to Prospective Investor – Once the selling agreement is signed by the broker dealer, its licensed, registered representatives can present it to prospective investors.