A Delaware Statutory Trust, or DST, is a real estate investment option that provides investors with a route to fractional commercial property ownership. A DST is a corporation that uses Delaware trust laws to establish a trust. Each shareholder owns a beneficial interest in the trust, holding the properties the trust buys. The IRS states that investors (referred to as trust beneficiaries) are each direct owners of all the trust's assets. As a result, they are entitled to the tax benefits of owning real estate, including the ability to use a 1031 exchange to enter or leave the DST.
The trust investors do not need to be in Delaware, and the properties also may be anywhere, although the DST needs one Delaware resident in the cohort of trustees. Delaware is friendly toward financial corporations, and the Delaware Statutory Trust Act (in 1988) increased the options for special purpose trusts and granted limited liability to the trustees.
All investments have risks, and real estate investments are no exception. DST investors must be prepared for exposure to interest rate volatility, lack of liquidity, market fluctuations, and asset value drops. DSTs have additional risks that investors may be able to avoid with direct property ownership. Those include lack of control, added fees, and regulatory changes.
Because the Delaware Statutory Trust Act (DSTA) afforded broad authority to the trusts created under the statute, trustees may have extensive powers if that is how the trust is written. Delaware does not require these trusts to be filed, so the parties to the trust and the nature of the agreement can stay confidential. The trust agreement is private, and it is the governing document for the entity. According to the DSTA, the drafters of the trust agreement can create the structure however they wish.
One crucial requirement is that the sponsors have a set offering period. That is the initial time when the fund can seek and accept investors. Potential trust participants use this time to examine the trust's plans, goals, and (likely) the past performance of the sponsors and management. Once that offering period ends, no additional investors or capital is accepted.
Another key provision is that DSTs cannot renegotiate loans for the trust's obligations or leases with tenants. The exception is if a tenant has defaulted on their lease or declared bankruptcy.
The Securities and Exchange Commission requires that investors in DST offerings be “accredited investors.” The existence of requirements for accredited participants is intended to protect unsophisticated investors from their own lack of knowledge. Offerings to a broader target group have more detailed disclosure requirements.
To qualify as an accredited investor, you must meet one of the following: