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What is a Springing LLC?

When the IRS created rules allowing the Delaware Statutory Trust (DST) ownership structure to be used as an acceptable “like-kind” 1031 exchange investment option, they mandated that the sponsor of the DST could not refinance the property or request additional funds from investors during the holding period. DST sponsors were also prohibited from negotiating new leases. 

If unforeseen circumstances occur that would require additional funds, e.g., loss of a major tenant, DST sponsors were provided with an option to convert the DST structure into a Limited Liability Company structure termed a “Springing LLC.” This LLC structure allows DST sponsors added flexibility to raise additional funds, renegotiate current loans terms, obtain new loans, or enter into new leases. 

Consequences of a Springing LLC

The Springing LLC acts as a safety net to provide an additional tool to a DST sponsor to protect investor interests and help avoid a negative outcome. However, when a property is converted from a DST to an LLC structure, investors generally no longer have an option to complete a 1031 exchange unless all the investors in the Springing LLC invest in a new 1031 replacement property. Since this option can be difficult to accomplish, DST sponsors strive to convert the Springing LLC structure back into a DST structure as soon as practical. 

The Springing LLC not only provides additional options to protect investor interests that are not permitted under the DST structure, but it also provides added security to lenders and can reduce risks of a loan default or foreclosure. 

It is important to note that since the creation of the 1031 DST structure in 2004, the Springing LLC option has rarely been used. During our firm’s history dating back to 2003, we have only been aware of several situations that required converting a DST into a Springing LLC. However, the existence of this option is analogous to having an insurance policy that is only needed in the event of an unforeseen emergency.  

To learn more about DSTs and the 1031 exchange process and how it may work with your portfolio, please contact us to schedule a consultation

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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