SUN PACIFIC 1031

• To accomplish an exchange, the seller ("exchanger") deposits all of the proceeds from the sale of real property (known as a "relinquished property") into a special trust account designated for purposes of consummating a tax-deferred exchange.
• These trust accounts are normally administered by Qualified Intermediaries (known as QI's) or other financial institutions. The Exchanger has a maximum of 180 calendar days from the closing of the sale of the relinquished property to complete the acquisition of the new property (known as the "replacement property"). Within the first 45 days of this period, the Exchanger must designate and properly identify one or more replacement properties.
• An Exchanger, however, may not identify more than three properties, regardless of value, or a group of properties with a combined value that exceeds 200 percent of the value of the relinquished property. Use of the 95 percent rule is also possible.
• The funds deposited into the trust account can be used as earnest money for the replacement property once all IRS requirements for a §1031 transaction have been satisfied
• If no replacement properties are identified in the first 45 days, or if the acquisition of the replacement property occurs more than 180 days following the sale of the relinquished property, the trust account will be disbursed, the proceeds will be returned to the Exchanger and the sale of the relinquished property will be taxed at the prevailing capital gains and/or ordinary tax rates.

• A tenant-in-common is a form of estate in land, or ownership, whereby two or more individuals own a fractional share of a whole piece of property (e.g., if 4 people own an asset as tenants-in-common, each may own a 25% fractional interest).
• While a tenancy-in-common has always been a common and longstanding form of joint ownership, the release of Revenue Procedure 2002-22 in March, 2002 by the Internal Revenue Service greatly enhanced the appeal and use of the TIC structure.
• The revenue procedure set forth a series of guidelines which, if complied with by a sponsor or a TIC investment program, would allow the sponsor to seek and obtain a favorable tax ruling that the tenant-in-common interests created by the sponsor would be deemed "like kind" property for purposes of §1031 and, as such, a qualified investment as replacement property necessary to accomplish an exchange.

Potential Benefits of a TIC Structure

Investor entity goes directly on title. A special purpose LLC is also created by the sponsor to help protect investing equity from liability. Investors have voting rights and input on major decisions regarding the property and investment.

Potential Risks of a TIC Structure

Major decisions must be made by unanimous or super majority decision. For certain types of problems or for specific assets types, reaching consensus can be difficult. While investors rarely have liability for the loan, often lenders will need to approve each individual TIC. Annual LLC fees are charged to maintain the SPE LLC created by the sponsors, this can range from $300 to $900 per year depending on the state of ownership. Please carefully review risk factors contained in the Private Placement Memorandum of any specific offering for additional risks to consider.

Delaware statutory trusts are governing agreements under which tangible real estate assets can be administered and managed by a trustee(s) for the benefit of a trustor who owns a beneficial interest in the property held by the trust.

Forming DST’s can be formed relatively simple and inexpensive. To protect each party involved, a private agreement governing the trust must be developed and agree to by all parties. Once the agreement is final, a Certificate of Trust can be obtained from the Delaware Division of Corporations.

In 2004, Internal Revenue Bulletin 2004-33 declared that:

"A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under § 1031, if the other requirements of § 1031 are satisfied”

The ruling opined that real property, held under a Delaware statutory trust, would be eligible for 1031 exchange, so long as trust met the following requirements:

• Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries.
• The trustee cannot renegotiate the terms of the existing loans and cannot borrow any new funds from any party, unless a loan default exists as a result of a tenant bankruptcy or insolvency.
• 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 for normal repair and maintenance, minor nonstructural capital improvements, and those required by law.
• Any reserves or cash held between distribution dates can only be invested in short-term debt obligations.
• All cash, other than necessary reserves, must be distributed on a current basis.
• The trustee cannot enter into new leases, or renegotiate the current leases unless there is a need due to a tenant bankruptcy or insolvency.

DST Potential Benefits

Generally, a DST can be a fairly simple structure with lighter paperwork and easier to follow governing agreements. As decisions can be made by the trustee, DSTs are often preferred by lenders which could lead to potentially better loan terms than other 1031-oriented structures. DSTs may also have lower minimum investment requirements and may be less expensive to maintain in the future.

DST Potential Risks

Sun Pacific 1031 believes the biggest risks to a DST structure relate to the risk inherent with the real estate investments itself and/or the limitations in the seven requirements listed above. As a result, Titan1031 believes that only certain asset types and property strategies are better suited for DST structures. Please consult the Risk Factors contained in the PPM of a particular offering for additional risk factors to continue.

• Accredited Investor

An individual investor with a net worth, or joint net worth with his or her spouse, of more than $1 million (inclusive of real property), or an individual with income in excess of $200,000, or joint income with his or her spouse in excess of $300,000, in each of the two most recent years and with a reasonable expectation of achieving the same in the current year. Generally, only accredited investors purchase 1031/TIC investments.

• Qualified Intermediary (QI)

The intermediary (or middleman) required to hold, in a segregated trust account, the sales proceeds realized by the exchanger from the sale of relinquished property. The QI retains the proceeds until the date the exchanger is prepared to close the acquisition or the replacement property and the expiration of either the 45-day identification period or the 180-day closing period.

• Broker-Dealer and Registered Representatives

Broker-dealers are companies licensed to sell securities to investors, and Registered Representatives are licensed salespeople employed by or affiliated with the broker-dealers who are engaged to sell the securities, and perform due diligence on the sponsoring firms and in selecting appropriate properties suitable to investors financial objectives and situations

• TIC Sponsor

The entity, typically an experienced real estate owner and investor that structures the investment, conducts due diligence, and continues due diligence throughout ownership for both acquiring and selling the asset, arranges the debt, raises the equity from Accredited Investors (using the services of Broker-Dealers and their Registered Representatives), manages the property (either internally or by hiring a third party), provides asset management services and sells the asset to realize returns for investors.

An individual investor with a net worth, or joint net worth with his or her spouse, of more than $1 million outside the primary residence OR an individual with income in excess of $200,000, or joint income with his or her spouse in excess of $300,000, in each of the two most recent years and with a reasonable expectation of achieving the same in the current year. Generally, only accredited investors can qualify to participate in a purchase a TIC or DST offering.

The intermediary (or middleman) required to hold, in a segregated trust account, the sales proceeds realized by the exchanger from the sale of relinquished property. The QI retains the proceeds until the earlier of the date the exchanger is prepared to close the acquisition or the replacement property and the expiration of either the 45-day identification period or the 180-day closing period.

Broker-dealers are companies licensed to sell securities to investors, and Registered Representatives are licensed salespeople employed by or affiliated with the broker-dealers who are engaged to sell the securities, and perform due diligence on the sponsoring firms and in selecting appropriate properties suitable to investors financial objectives and situations.

The entity, typically an experienced real estate owner and investor that structures the investment, conducts due diligence, and continues due diligence throughout ownership for both acquiring and selling the asset, arranges the debt, raises the equity from Accredited Investors (using the services of Broker-Dealers and their Registered Representatives), manages the property (either internally or by hiring a third party), provides asset management services and sells the asset to realize returns for investors.