Can You Lose Money Investing in a DST?

DST (Delaware Statutory Trust) investments are attractive to many people interested in real estate. The reasons for DST's popularity are numerous and include these:

• Participants can invest in real estate without active involvement as a landlord. 
• Investors (known as beneficiaries) can participate in owning properties they could not afford to purchase individually.
•  Investors can own a fractional interest in multiple sectors and asset classes through one or more DST investments.
•  Investors may benefit from tax advantages associated with DSTs.
•  DST debt is non-recourse, so participants are not exposed to losses beyond their investment. While investors can lose their capital investment, they are not subject to additional financial exposure to creditors. 
• Purchasing DSTs can facilitate the timely completion of a 1031 exchange to reinvest capital gains.

What is a DST?

DSTs are trusts formed under Delaware laws allowing enhanced legal protection and flexibility for ownership groups. Typically, a sponsor creates the trust and identifies and acquires the property (or properties) the trust will hold. The sponsor also manages the properties, often using a master tenant. The sponsor conducts due diligence, obtains financing, pursues tenant agreements, and markets to investors (beneficiaries.)

DST investors must be accredited, and the minimum investment is typically $100,000, although there are opportunities for smaller participation amounts. An investor can use multiple DSTs to create a customized real estate portfolio spreading assets across a range of property types, including multifamily residential, office properties, industrial facilities, and hospitality projects.

Are DSTs risky?

All investments, including all real estate investments, have risks. Investors may lose their entire capital participation. However, while total loss is a possibility, the more likely disappointment is lower than expected gains. The success of a DST depends on the skill and execution strategy of the sponsor. For investors accustomed to a hands-on approach to real estate, the lack of control can be frustrating, particularly if the sponsor isn’t executing a winning strategy.

DSTs also may involve high fees, including upfront commissions, ongoing management fees, and a percentage paid at disposition.

Using a DST to complete a 1031 exchange.

In many cases, investing proceeds from the sale of real estate into a DST is an efficient method of completing a 1031 exchange. Tight completion deadlines represent one of the significant execution risks for 1031 exchanges, and failure can leave the investor with an unwelcome capital gains tax bill. Using a DST investment for all or part of the replacement can solve that problem without the challenge of identifying appropriate assets that are the right size and also available.

However, although entry is often straightforward, DSTs have long holding periods and usually no opportunity for an early exit. Investors should not commit capital they may need before the stated term of the DST, which is as much as ten years. There is no public market for resale, and some DST agreements also prohibit or restrict resale.

As with any investment, the prospective participant should thoroughly evaluate the opportunity to ensure that it is suitable for their investment objectives, risk tolerance, and time horizon.