A Delaware Statutory Trust (DST) can be an attractive investment vehicle for owning investment real estate without management headaches. Investors interested in a 1031 exchange could find that a DST might be a good replacement property, as it’s easier to equate the value of fractional shares to that of the relinquished property.
However, not all investors qualify for DST involvement. Understanding investor requirements before pursuing DST ownership can help determine if the approach is feasible for your investment goals.
What Is a Delaware Statutory Trust?
The DST is a legal entity — specifically, a trust — that owns and manages a property. Investors join the DST by purchasing fractional interests in the trust. In return, they could receive income from the property’s revenue. DSTs are passive investments, meaning you don’t have to worry about the “trash, tenants, and toilets” involved with direct property investments. Furthermore, investment in a DST could also help you access institutional quality properties that might otherwise be beyond your reach.
However, DST ownership has downsides, one of which is that you have no control over property management, financing, or buy/sell decisions. Furthermore, if the DST sponsor makes poor decisions, the property’s value could fall.
Another downside is that DSTs are private investments, meaning that most offerings aren’t available to the public, and investors must typically hold their shares until the property is sold. In most cases, you have to be an accredited investor to take part.
Discussing the Accredited Investor
Accredited investors meet the following Security and Exchange Commission (SEC) criteria:
- A net worth of at least $1 million (excluding their primary residence) or
- An annual income of $200,000 ($300,000 for joint income) for the past two years, which you are also expected to earn in the current year.
- Hold a Series 7 (General Securities Representative), Series 65 (Investment Adviser Representative), or Series 82 (Private Securities Offerings Representative) license.
Accredited investors are believed to better absorb the losses involved with riskier investments. DSTs are typically structured for accredited investors because they involve private securities offerings under Regulation D. Regulation D allows DST sponsors to raise investment capital without going through the public offering process. Furthermore, the fractional shares offered don’t have to be registered with the SEC.
Delaware Statutory Trust and the Non-Accredited Investor
Some DSTs may allow non-accredited but sophisticated investors under Rule 506(b) of Regulation D.
This rule means the DST can raise an unlimited amount of money and sell securities to unlimited accredited investors. The rule also allows up to 35 non-accredited investors to participate in a DST as long as:
- The non-accredited investors must have a pre-existing relationship with the sponsor.
- The 506(b) offerings aren’t publicly advertised.
- The non-accredited investors must receive the same disclosure documents and financial statements as accredited investors.
A non-accredited investor must also be considered “sophisticated.” This means you have sufficient knowledge of and experience in financial and business matters to evaluate investment risks. While no strict proof is required, factors such as investment experience, education, or financial background may be considered.
Knowing DST Investor Qualifications
While Delaware Statutory Trusts can be viable investment strategies, not everyone can participate. The SEC mandates that only accredited and sophisticated non-accredited investors can join this investment vehicle. Understanding the requirements for DST offerings can help you determine if you’re qualified, especially as you work through your 1031 exchange.
For additional guidance regarding DST eligibility requirements, please contact Realized 1031 by visiting realized1031.com.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
