1. Evolution of the 1031
Vernon Henifin is a Registered Representative and Investment Advisor Representative offering securities and advisory services through Centaurus Financial, Inc. - Registered Broker/Dealer, Member FINRA/SIPC, Registered Investment Advisor.
Supervisory branch/HQ: 2300 E Katella Ave #200, Anaheim, CA,
This presentation was created for the purpose of educating licensed professional real estate agents and is not for the general public. This is a brief and general description of certain 1031 guidelines and does not include all relevant provisions of a 1031 exchange exchanges are complex transactions and failure to comply with all requirements could result in the loss of the desired tax deferral. Investors should consult with independent tax or legal counsel prior to initiating a 1031 exchange.
This is not an offer of securities, which must be accompanied by an offering disclosure document and only after investor suitability has been determined. DST and TIC offerings are for “accredited investors” only. There is no guarantee that the investment objectives of any particular TIC or DST program will be achieved. Investors could lose their entire investment, including principal.
TIC and DST investments are highly illiquid. No public market exists for their sale or re-purchase and investors should be prepared to hold their interests for an unspecified period.
Investments in real estate are subject to varying degrees of risk, including, among other things, local conditions such as an oversupply of space or reduced demand for properties, an inability to collect rent, vacancies, inflation and other increases in operating costs, adverse changes in laws and regulations applicable to owners of real estate and changing market demographics. 

2. Evolution of the 1031
Presented By
Vernon L Henifin
Northwest Financial Solutions
14050 SW Pacific Hwy, Suite 212 Tigard Or, 97224
Phone

3. Evolution of the 1031
1031 Exchanges offered by FINRA Broker Dealers
Revenue Procedure
Tenant in Common
Revenue Procedure
Delaware Statutory Trust

4. 1031 Basics
Real Estate Investors are looking for:
Alternative to Standard 1031 Exchange
Potential to Increase Cash Flow
Eliminate Daily Property Management
Defer Income Taxes

5. 1031 Exchange Basics
QI account must be opened prior to close
Sale proceeds must go to QI
To qualify for 100% deferral:
100% of equity has to be re-invested
Assume as much or greater amount of debt

6. 1031 Details to Know
Specify Replacement Property
Three Property Rule
200% Rule
95% Rule
Time Line

7. 1031 Details Investors Need to Know
45 Days Is Often The Problem
1031 Tax-Deferred Exchange Timeline
180 Days Generally Not The Problem
45 Calendar Days
180 Calendar Days
Date That Original Property Is Sold
Must Name Replacement Property with QI
Must Purchase Replacement Property

8. Tenant in Common vs
DST Master Lease

9. Tenant in Common Structure
What is a Tenant in Common?
IRS Revenue Procedure
Maximum of 35 investors
Sponsor/Asset Manager signs a non recourse loan guaranty
Investors sign- “What they are responsible for”
Unanimous consent decisions – sell, refinance, annual budget & selection of new asset manager
Agreements
Financing

10. Tenant in Common Structure
PROPERTY
TIC #1
TIC #2
TIC #3
UP TO TIC #35
Asset & Property Manager / Agreement
Loan Doc’s & Loan Guaranty
Tenant In Common Agreement
Call Agreement Agreement
Recorded
Recorded
3rd Party On Site Mgr
Affiliate of Asset Manager Asset Manager Signs Non Recourse
Carve-out Loan Guaranties
Asset Manager Loan Guaranty
Master Lease Alternative

11. The DST Option
What is a DST- Delaware Statutory Trust?
Created under Delaware Law - considered separate legal entity
Must comply with IRS Rev. Ruling
DST Real Estate Investment is Ownership of Beneficial Interests in the Trust - considered direct
R.E. ownership by IRS and taxed accordingly
Owners receive proportionate share of Income, tax deductions and appreciation

12. The DST Option
What is a DST- Delaware Statutory Trust?
Title to R.E. is held by Trust, rather than Beneficiaries, an individual, LLC, Corp or Partnership
The Trust has Title Insurance
The DST can have as many as 499 unrelated DST Investors
A DST Owner’s share in the Trust and economic benefits and risks is equal to the percentage of their Trust Beneficial Ownership in the Trust

13. Delaware Statutory Trust
Investors (Beneficiaries)
Master Tenant
(Delaware LLC)
PROPERTY
DST
(Borrower under Loan)
Property Leased to Master Tenant by DST
Asset & Property Manager
Signatory Trustee (Delaware LLC)
Affiliates of Sponsor/ Asset Manager
3rd Party On Site Mgr
Sponsor Company & Sponsor Principal Sign Non Recourse Carve-out
Loan Guaranties

14. “The Seven Deadly Sins”
Once the Offering is Closed, there can be No Future Contributions to the DST by Either Current or New Investors.
The Trustee Cannot Renegotiate the Terms of the Existing Loans Nor Can It Initiate Any New Secured Loans from Any Party. Two Exceptions are if the Current Loan is in Default or in Imminent Danger of Being in Default or if the Tenant is Insolvent or Bankrupt.

15. “The Seven Deadly Sins”
The Trustee Cannot Reinvest the Proceeds from the Sale of its Real Estate.
The Trustee is Limited to Making Capital Expenditures with Respect to the Property to those for:
Normal Repair and Maintenance
Minor Non-structural Capital Improvements and
Those Required by Law.
Any Cash Held Between Distribution Dates Can Only Be Invested in Short-term Debt Obligations.
All Cash, Other Than Necessary Reserves, Must Be Distributed.

16. “The Seven Deadly Sins”
The Trustee Cannot Enter into New Leases or Renegotiate Current Leases. Two Exceptions are if the Current Loan is in Default or in Imminent Danger of Being in Default or if the Tenant is Insolvent Or Bankrupt.
In Addition a DST Must be:
A Special Purpose Entity;
Bankruptcy-Remote;
A Very Passive Holder of Real Estate (The Trustees Will Have Minimum Powers and the Beneficiaries Will Have No Powers with Respect to the Mortgaged Property).

17. Master Lease
Master Lease Details
Typically an affiliate of the Sponsor
Newly formed Bankruptcy remote entity (meets lender requirements)
Established with initial capitalization in the form of cash and/or demand note of the Sponsor
Lender mandated capital expense reserves

18. Master Lease Agreement
100% of Building Leased to Sponsor/Affiliate as Master Leases
Sponsor/Affiliate Sub-Leases Building to Actual Tenants
Master Lease Payments Made to DST Investors
Sponsor/Affiliate Pays Property Expenses
Sponsor/Affiliate Retain Remaining Cash Flow
DST Owner 1
DST Owner 2
DST Owner 3
DST Owner 4
DST Owner 5
DST Owner 6
DST Owner 7
DST Owner 8

19. Sponsor DST / Master Lease Features
Master Tenant Capitalization
Cash Reserves
Demand Note
Lender Mandated Capital Expense Reserves
Delaware Statutory Trust Capitalization
Upfront Trust Reserves

20. Sponsor DST / Master Lease Features
Sponsor Modified Master Lease
Shared Expense Risk
Sponsor responsible for:
Payroll, administration, repairs/maintenance
Sponsor NOT responsible for:
Taxes, insurance and utilities
Supplemental Rent

21. Sponsor DST / Master Lease Features
Sponsor Modified Master Lease
Base Rent
Set conservatively to avoid default
Supplemental Rent
Shared between Sponsor and Beneficial Unit Holders
50%/50% on excess gross revenue
- In lieu of property/asset management fees

22. TIC vs. DST Structure Comparison
TICs DSTs
Only 35 Investors Up to 499 Investors
Summary
DST Can Help Facilitate Lower Minimum Investments
Minimal Property Management Responsibilities
No Property Management Responsibilities
DST Provides Less Management Responsibility
& Control to Investors
Presenter
:57:42
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Up to 35 Separate Loans, Underwritings and Real Estate Closings
Lender Only Makes One Loan to DST/Trustee/Sponsor
DST Efficient Closing Process - Investor Doesn’t Apply/Not Liable for Loan; Collection Remedies are Simplified from Lender’s View
All Major Decisions Require Unanimous Investor Agreement
Trustee has Obligation of Good
Faith and Fair dealings
DST & TIC Offer Professional Property Management; TIC Offers Voting Rights to Investors for Major Decisions such as Property Sales, Refinancing and Leasing Decisions.

23. TIC vs. DST Structure Comparison
TICs DSTs
Summary
DST Generally Less Complex
/Costly Structure, Eliminates LLC and Fees; Syndication Costs, Loads, Commissions / Fees Apply to Both
Investors Must Set Up And Pay for Individual LLCs
Investors Do Not Need Individual LLCs
1031 Upon Property Sale
1031 Upon Property Sale
Both Can Facilitate a 1031 Tax-Deferred Exchange and Also Have Option of Up-REIT
Presenter
:57:42
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Income, Gains, Deductions Income, Gains, Deductions
Fairly Identical
and Credits Reported on Investor’s Individual Income Tax Return
and Credits Reported on Investor’s Individual Income Tax Return
DST is Based on Substantive Law; Rev. Proc is a Non-binding Procedural Guideline Followed by IRS When Examining Priv. Let.
Ruling Requests
Rev. Proc Provides IRS Guidance on How To Apply
IRS Rev Ruling Provides Specifics on How to Maximize Compliance

24. TIC vs. DST Structure Comparison
TICs
DSTs
Summary
Deed of Trust Issued for Undivided Fractional Interest
Investor Receives a Beneficial Interest in the Trust as Ownership
Both Serve as Valid Forms of Ownership for 1031 Replacement Property
DST has Specific Planned Exit Timeframe, TIC has Additional Flexibility
Property Sold in the Future When It Makes Economic Sense
Property Sold Prior to Loan and Lease Terminations
Presenter
:57:42
Read slide
Added Investments – OK
Added Investments – NO
TIC Can Raise Funds
TIC Interest Can Be Sold to Accredited Investor with Bank Approval
DST Interest Can Be Sold to Accredited Investor Without Bank Approval
DST has Fewer Roadblocks to Selling Beneficial Interest

25. TIC vs. DST Structure Comparison
TICs
DSTs
Summary
TIC Flexibility – DST Will Use Long-term “A” Credit Triple Net or Master Leases
Manager Can Re- Negotiate Leases on Behalf of Investors
Leases Can’t be
Re-Negotiated Except as Previously Provided
Reserves Will Typically Be Established for Future Expenses
Presenter
:57:42
Read slide
Reserves Will Typically be Established for Future Expenses
DST Reserves Will Typically be Higher than TIC Reserves
Sales, Refinancing and Property Issues Will Be Lease Decisions Typically Handled by
Require 100% Investor Sponsor/Affiliate Approval
DST Can Potentially Provide Quicker Response to Problems; TIC Potentially Provides More Management Control to Investors

26. The
Due Diligence Process

27. Due Diligence
The Goal of Due Diligence is to:
Provide information for Investors to make an informed decision.
There Is No Guarantee that the Due Diligence Process Will Succeed In This Goal. Even Though Due Diligence is Performed on a Specific DST Offering, the Specific DST Offering Is Not Guaranteed to Succeed.

28. Evaluating DST Opportunities
Evaluate the Sponsor?
What is the Experience of the Sponsor?
What is the Track Record of the Sponsor?
Analyze Replacement Property
Location, Location, Location
What is the Condition of the Property?
Is the Property Underwriting Reasonable and Realistic?

29. Evaluating DST Opportunities
Analyze DST Program
Is the DST A Master Lease or a Management Agreement?
How Much Reserves Are Set Aside?
What are the Fees Being Charged?
Evaluate 1031 Tax Compliance
Does the Structure meet the guidelines of the IRS?
Does the LTV satisfy the exchange needs?
Is the Sponsor’s Law Firm providing a Tax Opinion?

30. DST Due Diligence Components
DST INVESTOR
SPONSOR MASTER LEASE PROVISION
INVESTOR DUE DILIGENCE
SPONSOR RESERVES
LENDER RESERVES
ADVISOR DUE DILIGENCE
SPONSOR DUE DILIGENCE
LENDER DUE DILIGENCE
BROKER DEALER DUE DILIGENCE
THIRD PARTY DUE DILIGENCE

31. DST Real Estate Investments – Not Just for 1031’s
Some Professionals and Investors May Believe that DST Real Estate Investments are Limited to 1031 Tax-Deferred Transactions. This is Not the Case – DSTs are Available to Non Investors for Cash Investment Also and Can Provide These Potential Benefits:
Tax Cost Basis Equals Cash Investment Plus Debt
Daily Management Handled by Sponsor/Affiliate
Potential for Quality Real Estate & Tenants

32. DST Real Estate Investments – Not Just for 1031’s
Potential for Competitive Returns from Net Rental Income
1031 Tax-Deferred Opportunity of Future Gains
Experienced Property Management Team
Non-Recourse Debt
Possible Opportunity for Conservative Debt-to- Equity Percentages

33. DST Real Estate Investments – Not Just for 1031’s
Vernon L Henifin
Northwest Financial Solutions
14050 SW Pacific Hwy, Suite 212 Tigard Or, 97224
Phone
Securities and Advisory services offered through Centaurus Financial Inc.
Member FINRA and SIPC Supervisory branch: 2300 E. Katella Ave, Suite 200, Anaheim, CA, 92806
Centaurus Financial and Northwest Financial Solutions are not affiliates.