When you open a brokerage account to trade stocks, the account must first be funded before any stock trades occur. The broker uses a separate entity called a custodian to hold your cash. As trades are opened and closed, cash moves in and out of the custodian account.
A custodian is used to segregate funds between the broker’s responsibility of executing trades and the holding of cash, which is more of a bank responsibility and where the custodian comes in.
A Delaware Statutory Trust (DST) is a trust rather than a security (i.e., stock). Are custodians needed for DSTs in the same way that stockbrokers use them?
When you invest in a DST, you receive fractional interest in real property. Your fractional ownership is very different from the shares you get when investing in a stock. DST fractional ownership provides all of the advantages of owning real property. It’s as if you purchased direct real estate.
These potential advantages include:
- The use of leverage, which is managed by the sponsor
- Depreciation of the property held in the DST
- Potential monthly income
Role of the Sponsor
A sponsor is a critical component of a DST. They are the ones using investor funds to purchase properties for the DST. Choosing a DST with a reliable, experienced, and knowledgeable sponsor can help ensure that your funds are efficiently invested.
In addition to investing funds, the sponsor manages any distributions to investors, may oversee the management of properties, and handles financing.
DSTs and Custodians
For DST investor funds, there may be specific periods when some of the investor cash is not invested. This may occur between distributions. When that happens, cash is typically invested in short-term debt securities such as U.S. Treasury bills.
The DST sponsor manages all available funds and invests them in properties. Before properties are purchased, the sponsor arranges deals with sellers. While these deals are being arranged, the sponsor works with its broker-dealer or representatives to raise funds from investors. Because investor funds aren’t sitting around in an account waiting to be invested, there isn’t any need for a custodian. The investor funds remain with the investor until it is time to invest in the DST.
From the investor side, DSTs don’t utilize custodians. As a new DST begins seeking deals, there are no funds to purchase properties. Once deals move closer to finalizing, the sponsor will then begin raising funds from investors. Investors will need to deposit funds into the DST to close on properties, which then go straight to funding properties. Because there isn’t a period when investors funds aren’t deployed, DSTs don’t need custodians to hold investor funds.