In recent years, Delaware Statutory Trusts (DSTs) have become a popular investment vehicle, offering income from institutional-quality assets while providing tax-deferral benefits. However, to enjoy these advantages, you must first meet DST investor qualifications. One of these is the minimum investment requirement.
While the required capital varies from DST to DST, a few key elements serve as common factors in determining the minimum investment. Realized 1031 shares these considerations to help you stay informed. Keep reading to learn more.
All DST offerings will set a minimum investment requirement. This threshold represents the lease amount an investor must contribute to begin participating in the trust. Various factors affect the minimum, but the common range is between $100,000 and $500,000. However, there are some that can go as low as $25,000.
If you’re an investor entering a DST to complete a 1031 Exchange, this minimum is not just a guideline. The threshold becomes a key consideration to whether or not a particular DST fits your strategy. That’s because 1031 Exchanges have the equal-or-greater-value requirement. If that DST has a low entry relative to your proceeds, then you may need to find other offerings to be able to reinvest all your proceeds.
DST sponsors don’t just choose an arbitrary number to set as a minimum entry requirement. They consider various factors to arrive at the value.
The underlying properties of DSTs can range from small multifamily homes to large office buildings worth millions of dollars. Of course, the bigger the property, the higher the capital needed to acquire it. Those who want to enter DSTs with institutional-grade assets will typically face higher minimum capital requirements and vice versa.
The Securities and Exchange Commission (SEC) sets a limit of 499 investors for DSTs to avoid becoming a public entity. However, DST sponsors have discretion regarding the maximum number of investors who can own beneficial interests. Some can even have as few as 10 investors. Whatever the case, the sponsor will total the capital requirement and divide it among the participants. As such, the fewer the investors, the higher the minimum requirement amount.
DST sponsors have their own preferences, philosophies, and capital-raising strategies. Some prefer fewer, higher-net-worth investors, which means higher minimum requirements. Others aim for a broader base of accredited investors. The former is usually targeting more sophisticated investors who want higher returns. Meanwhile, the lower minimums of the latter option make investment more accessible to those who are comfortable with lower proceeds.
Under Regulation D, DSTs are considered private placements. This means that only accredited investors are allowed to participate in this investment. For individual investors, they must reach either of these two thresholds to become eligible for the accredited status.
DSTs usually impose minimum amounts that ensure investors meet accreditation standards comfortably.
The asset class and perceived stability of the underlying property can also affect the minimum investment requirements. For example, properties under a triple net lease often command higher limits because of the long-term stability and predictable income. Meanwhile, DSTs with multifamily or industrial properties typically have lower thresholds as they often aim for a broader pool of investors.
As you plan to finish your 1031 Exchange by entering a DST, you may find the investment requirement a limiting factor. The IRS requires you to reinvest all the proceeds from the relinquished property, but this value may be too high or too low compared to the DST offering’s minimum capital threshold.
Because of this possibility, you must carefully plan to match the amounts. The issue won’t be as challenging if the minimum is lower than the proceeds. You can simply find another DST where you can invest the rest, or invest all the proceeds in the current offering since you already meet the threshold. If the minimum is higher than the proceeds, then you may need to secure financing or find another DST with a lower threshold.
You can, but the practice is uncommon. DST offerings are pre-packaged investments, so it’s expected that you meet the minimum investment amount. Plus, the nature of DSTs as structured investments limits what you can do. However, some sponsors do occasionally allow for lower entry points, especially for 1031 Exchange investors who are falling just short of the initial minimum.
DST sponsors determine the minimum amount you’re required to contribute before you can participate in the trust. Many factors impact the threshold, including the asset’s value, the number of investors involved, and even sponsor preferences. Whatever the case, knowing this value is crucial for 1031 Exchange investors to plan and meet reinvestment requirements.
https://www.investopedia.com/terms/r/regulationd.asp
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors