A Delaware Statutory Trust (DST) is one of the most common investment methods when considering a 1031 exchange.
Although Delaware is in the name, you can complete a DST investment anywhere in the United States. Neither the investor nor the property needs to be in Delaware.
A DST is a pre-packaged investment on a property put together by a sponsor. After the sponsor does due diligence, negotiates lease terms, and takes other steps to put the package together, then they offer equity to investors. The trustees pool their 1031 exchange funds for the investment and then receive cash distributions if the property is profitable.
There are several benefits when considering completing a 1031 exchange into a DST, including:
- No landlord or property management responsibilities.
- Ability to diversify how much you invest, creating the possibility of investing into multiple DSTs.
- Tax efficiency with the ability to defer capital gains taxes.
- A DST saves time because the sponsor does all the legwork.
- Cash flow is generated monthly based on the net cash-flow of the investment.
Here are some important terms to understand if you are considering a 1031 exchange into a DST.
Accredited Investor
Investors in a DST must have a net worth higher than $1 million or income exceeding $200,000 if single and $300,000 if filing jointly.
Acquisition Fees
Sometimes referred to as a finder's fee, the acquisition fees for a DST are payments to the sponsor that set up the DST.
Broker-Dealer Allowance
The managing broker-dealer for the DST is reimbursed costs for things like marketing and due diligence.
Cash-Out Transactions
A cash-out transaction is a newer type of DST structure where investors can access the equity by assuming a property's debt.
Direct Properties
When an investor owns 100 percent of a property it is a directly owned property. A DST is an ownership in an indirect property because there are multiple investors.
DST Interests
DST interests are when the equity ownership of a property is split by multiple investors through a DST.
DST Sponsor
The DST sponsor is responsible for the due diligence, inspections, setting up property management, and other activities to pre-package the DST before 1031 investors can become trustees.
Illiquid Investments
Because DST's have long hold times, or are illiquid, they might be better suited to long-term passive investors.
Indirect Properties
An indirect property is one that is owned by a group of investors. A property owned by a DST is considered an indirect property.
Institutional-Grade Assets
Because the property is owned by multiple investors, a DST is more likely to be an institutional-grade asset, which means it is of higher quality and would merit the attention of larger investors.
LLC Conversion
The sponsor can convert the DST into a Limited Liability Company (LLC) if they find that the DST might lose the asset. This allows the partners to raise additional capital, renegotiate leases, and change financing.
Master Lease Agreement
Because a DST is a passive investment for the trustees, only the sponsor can conduct leasing activities. The sponsor creates a master lease agreement with a master tenant who operates the property and pays rent to the trust.
Non-Recourse Debt
In a DST, the investors generally do not have personal liability for the debt, making it a non-recourse debt.
Passive Investments
The sponsor makes all the decisions for the trust, making it a passive investment for the trustees as opposed to an active investment where they would be responsible for day-to-day management.
Pre-Packaged Investments
A DST is a pre-packaged investment because the sponsor has done all the legwork and presents the investment as an entire package before the trustees join the DST.
Seasoned DST Interest
A DST property is a seasoned trust when the property has at least 12 months of operating after the trust is formed.
Wholesaling
Selling teams used by sponsors to make sure they have everything they need to sell interest in a DST successfully. They are usually paid a commission.
Zero Cash-Flow Structure
A zero cash-flow structure is when the income from the property is used to service the debt. While there may not be much cash flow, high credit clients tend to be reliable lessees.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
