The tougher financing climate is prompting some tenant-in-common sponsors to pursue a more “lender-friendly” alternative — the Delaware Statutory Trust.
Both investment vehicles are similar in that they allow for a group ownership structure that can be pre-packaged and sold as securities. Unlike a TIC, investors in a Delaware Statutory Trust do not hold a deed on the property. The deed is held by the trust.
Banks and life insurers prefer the trusts because they are lending to one entity — the trust — rather than up to 35 individual co-owners in a TIC. The downside of the Delaware model is that it comes with more restrictions. For example, the trust cannot enter into new leases or even renegotiate current leases.
“The reason you see more sponsors looking at the Delaware Statutory Trusts now is that lenders are more receptive to that type of structure, and sponsors are having more success in getting financing,” says Kevin Peay, director of business development at Omni Brokerage in Salt Lake City.
In 2007, there were 15 Delaware Statutory Trusts brought to market and another six have been closed during the first eight months of 2008, according to Omni Brokerage.
Fannie Mae has shied away from TIC deals because of the large number of individual investors involved. “We have had success in selling the Delaware Statutory Trust to Fannie Mae as an alternative structure,” says Patricia DelRosso, president of Inland Real Estate Exchange Corp. and president of the Tenant-In-Common Association.
Inland has completed several Delaware Statutory Trust transactions in the past year, including a four-building office campus occupied by a financial institution with an “A” credit rating. Inland recently purchased the buildings for about $200 million. “We are very excited about the quality of that property,” DelRosso says.
The Internal Revenue Service issued a 2004 ruling that recognizes the Delaware Statutory Trust for use as a like-kind property in tax-deferred 1031 exchanges. Yet the structure has been overshadowed by the more successful TIC model in recent years.
The reason the trusts have not been widely used stems from restrictions on how the trust operates and manages the property. Industry experts emphasize that a Delaware Statutory Trust is not a good fit for every property owner, even though the trusts are gaining favor with lenders. It's important for investors to weigh the pros and cons of each vehicle.