As an investor evaluating Delaware Statutory Trust (DST) offerings, you’re focused on aspects like tenant creditworthiness, sponsor experience, and projected financials to determine if the specific investment is worth it. However, there is one aspect that some investors don’t pay enough attention to: the DST portfolio composition.
There are two categories: single-asset and multi-asset portfolios. These Delaware Statutory Trust structures each carry unique characteristics and risks that affect your cash flow, returns, and overall investment goals. Realized 1031 helps you understand the differences through this insightful guide. Keep reading to learn more.
Single-Asset DSTs
The first category is single-asset DSTs. As the name implies, these investments have only one real estate asset under a unified trust. Investors pool their 1031 exchange proceeds to acquire fractional interests in this single piece of property.
Commonly, the property owned by the DST is a high-value, institutional-grade asset with a single long-term lease from a creditworthy tenant. Examples of these are large healthcare facilities, big box retail stores, and industrial distribution centers.
Pros
- Simplicity and Transparency: One of the biggest advantages of single-asset DSTs is how they offer simplicity. There’s one property with one tenant, providing one single income source. This straightforward structure also makes the DST more transparent.
- Focused Underwriting: It’s easier to analyze rent rolls, lease terms, and capital expenditure needs with a single building.
- Lowered Tenant Default Risk: Sponsors only enter lease agreements with tenants who have strong financials and high credit ratings. This thorough vetting process reduces the chance of tenant default while improving demand during disposition.
- Predictability: Since there is only one property, it’s much easier to predict timelines and disposition. This advantage is especially significant for 1031 exchange investors who are planning to reinvest and preserve their tax-deferred status.
Cons
- Concentration Risk: Since there is just one property, there’s an increased concentration risk. If the asset underperforms, there are no other buffers that can help stabilize cash flow.
- Limited Diversification: The singular asset also limits diversification, exposing you to the economic cycles of that specific sector.
- Dependence on Tenant Stability: Finally, DSTs with a single-asset portfolio are highly reliant on the performance of the tenant. We’ve mentioned that most tenants in single-asset DSTs have high credit ratings, but they are not immune to other market factors that could affect profits or demand. If these are unfavorable, then the tenant may struggle to meet rental payments and other financial obligations.
Multi-Asset DSTs
In contrast to single-asset DSTs, multi-asset trusts own two or more properties. As you purchase beneficial interests, you’re buying into the entire portfolio instead of just one of the assets. DSTs with multiple assets own buildings, structures, and other real estate across multiple sectors and geographic locations.
Pros
- Enhanced Diversification: When you invest in trusts owning multiple assets, you can enhance diversification to degrees that single-asset DSTs can’t replicate. You gain access to income from various markets and tenant types.
- Risk Mitigation: Increased diversification also lowers overall risk. If one asset or sector underperforms, the other properties can help mitigate losses and preserve cash flow.
- Broader Market Exposure: Portfolios may include properties in multiple regions, providing insulation from localized economic downturns.
- Stable Cash Flow: Since the DST is not relying on the performance of a single asset, the cash flow becomes more stable, and returns tend to be more consistent.
Cons
- Increased Complexity: While investors are largely shielded from the complexity of managing multiple assets, matters like income tax filing for multiple states become more intricate. Solutions like composite returns may provide some ease, but you’ll sacrifice state-specific benefits for these comprehensive taxation solutions.
- Potentially Higher Entry Minimums: Since the DST owns multiple assets, higher acquisition costs will lead to higher entry minimums.
- Less Transparency: Some investors may feel less connected to the underlying assets compared to a single-property structure.
Which DST Portfolio Composition Is Ideal for Your Investment Goals?
When comparing 1031 exchange investment options, the choice still depends on your goals. If you want simplicity and transparency, single-asset DSTs are the ideal option. Those who prioritize diversification and risk management will find multi-asset DSTs as the better choice. The great thing is that, as long as you have enough capital, you can invest in both DST portfolio structures. This strategy is allowed in 1031 exchanges under the 200% rule.
Wrapping Up: Comparing Single-Asset vs. Multi-Asset DSTs
When comparing DST asset types, the differences between single-asset and multi-asset trusts become more apparent. Understanding these unique advantages and disadvantages is critical, as the knowledge helps investors evaluate DST offerings more thoroughly and make more intentional choices.
Sources:
https://calawyers.org/real-property-law/what-is-a-1031-exchange/
https://www.thetaxadviser.com/issues/2014/mar/tpm-mar2014/
https://www.investopedia.com/terms/n/net-lease.asp