Does a Delaware Statutory Trust Require an Owner Trustee?

 Delaware Statutory Trusts (DSTs) are passive investment vehicles that provide investors with fractional ownership of commercial real estate. Often, the investor (also referred to as an owner or beneficiary) can gain access to properties they could not afford to buy on their own. DSTs are increasingly popular as investment options for accredited investors. Some of the attractions of the model include:

• Passive investment, allowing the beneficiary to receive income from the property without active management.
• Potential portfolio diversification.
• Ability to enter and exit using a 1031 exchange. The 1031 exchange allows investors to defer capital gains taxes if they meet the IRS requirements. DSTs are valid investments for an exchange strategy.
• Limited liability, since investors' liability is limited to their investment amount, and creditors may not seek recourse from them.

How are DSTs structured?

A Delaware Statutory Trust (DST) is a legal entity that investors can use for various business purposes. One of the critical features of a DST is that it does not require an owner trustee. This means that the beneficial owners of the trust can also serve as trustees, which can save time and money. However, there are some potential drawbacks to having an owner trustee, such as the possibility of conflicts of interest. Ultimately, the decision of whether or not to have an owner trustee is a complex one that should be made on a case-by-case basis.

The Delaware Statutory Trust Act of 2002 updated the rules for creating DSTs. The language refers to allowing but not requiring service as trustees by the beneficiaries (owners).

What is required of Trustees?

DSTs must have at least one Trustee located in Delaware, but the properties and investors do not need any tie to the state. The Trustees hold the legal title to the assets contained in the trust, but the private trust agreement drives their actions. It's important to note that the sponsor identifies the properties, arranges for financing and acquisition, and markets the trust investment to potential participants.

DSTs have some structural limitations, including these:

The DST can't buy additional properties once formed or use income to finance improvements. Trustees can't renegotiate leases or loans for the owned assets, and DSTs can't seek additional investors once the offering is closed.

Does it make sense for an owner to also serve as a Trustee?

While a beneficiary owner can serve as a Trustee of a DST, it appears to be uncommon. If the organization is small, with limited holdings, it might make sense to streamline the operation and reduce potential trustee fee payments. Also, an owner serving as a Trustee can gain some control over functions they would not have with a role limited to an investor.

However, some potential drawbacks should receive careful consideration. Since the DST Trustees have a fiduciary responsibility to the beneficiaries as a whole, an owner in a dual role might encounter conflicts of interest. On top of that, as a Trustee, the beneficiary could be liable for adverse results that arise from a fiduciary breach or mismanagement of the trust. In this situation, the beneficiary/trustee should be careful to avoid potential conflict.