Once the decision to invest in real estate has been made, there are a number of options available to the investor. If the investor's funds are of sufficient size, it may rely on its own expertise to oversee the management of the real estate it acquires. Alternatively, as is most often the case, it may employ the services of a third-party advisor to manage the real estate portfolio either in whole or in part. What follows are brief descriptions of the investment options available.
Direct Real Estate Ownership
As indicated by the description, you (individually, through your trust, or other various forms of co-ownership) own the investment real estate. You can choose to manage it yourself and hire a 3rd party manager to do it for you. Given the sophistication of the manager, you may also need to hire an accountant and/or tax attorney to help maximize on the benefits provided to you under direct ownership. This would include depreciation and mortgage interest deductions if you put a loan on the investment property. You also have the ability to make all decisions regarding your property including when to refinance or sell the asset not to mention the day to day decisions you chose not to authorize others to do for you.
- Master Leased Investment Properties
The Master Lease structure comes into play when an investor works with the Seller of a property whereby the Seller agrees to lease back the property from the Buyer and provides the Buyer a schedule of lease payments over the length of the Master Lease which is typically 10 yrs. In most cases, the Master Lease allows the Master Lessee to keep any cash flow generated by the property which is in excess of what is required to be paid the Master Lessor. And additionally, if the cash flow generated by the property is less than the cash generated at the property, the Master Lessee is obligated to fund the shortfall from its own sources.
- Ground Lease Investments
A ground lease is more typical when it comes to acquiring raw land that is intended to be developed. And for investors who have existing real estate without any debt associated with it, doing a 1031 exchange to acquire a piece of land and then make arrangements with the developer to lease back the ground from you for up to 99 yrs. (most ground leases are initially between 59 and 99 yrs. in length.) The Ground Lease will call for monthly payments to be made by the developer and/or operator of the property once it is constructed and typically has annual increases in lease payments by either a set amount, a CPI or adjustment to market value mechanisms to help grow the lease payment income stream to the investor.
Tenants In Common
The Tenant In Common ("TIC") structure has been widely used over the past years when more than one investor wanted to own a piece or fraction of an investment property with other investors rather than owning it outright. Each fractional owner retains certain rights in how the property is operated, refinanced or ultimately sold. A Tenant In Common Agreement is the governing document which spells out certain rights of each TIC owner and the terms must agree with the terms and conditions outlined in the IRS guideline Revenue Procedure 2002-22. One of the advantages of utilizing this form of ownership was that an owner could sell an existing property utilizing a 1031 Tax Deferred Exchange and take a portion of a much larger asset and engage professional management rather than dealing directly with tenants in a wholly owned property. This structure was widely used from 2004 through 2015 when larger investment properties were being offered to investors. However, after 2015 the lending community for the most part stopped making loans to TIC ownership structured properties given the challenge of consensus building with the TIC ownership group when it came to unanimous consent requirements needed for a change in management, refinance or sale of a property.
Delware Statutory Trust
The Delaware Statutory Trust ("DST') structure of ownership replaced for the most part the TIC structure of ownership when it came to individual owners wanting to exchange out of their wholly owned property into a much larger property. Unlike the TIC structure, the DST structure does not require active participation of the investors. The Trustee makes all the decisions on how the property is operated and when the property is sold. The DST structure does not allow for a refinance of the property so prior to the loan maturing, the property must be sold.
However, the investor can continue to do a subsequent 1031 Exchange or cash out as they see fit. There are strict requirements for a DST structure to qualify and maintain the 1031 Tax Deferred status. The requirements are commonly referred to as the Seven Deadly Sins. The DST structure became an alternative to the TIC structure when the IRS issued Revenue Ruling 2004-86 in August of 2004.