How Delaware Statutory Trust Ownership Structures Work

Delaware Statutory Trusts (DSTs) are real estate investment vehicles that allow multiple investors to own a fractional interest in a single property. DSTs are established by a Sponsor, who identifies and acquires all properties held under trust. Investors then purchase fractional shares in the DST, which gives them a right to a portion of the property's income and appreciation according to the pro rata share of their investment. 

Here are some key features of DST ownership. 

• Fractional DST ownership: Investors can own a small piece of a large property, which can make it more affordable to invest in commercial real estate. 
• Passive income: DSTs can generate income from rent payments, which may provide investors with a steady stream of passive income. 
• Tax benefits: DST ownership qualifies for certain real estate tax benefits, including 1031 exchange eligibility both upfront and upon exit. 

DSTs are passive investment vehicles that allow investors to purchase fractional shares of commercial real estate properties that typically would be well beyond their financial means as solo investors. These assets typically include industrial buildings, self-storage facilities, freestanding multi-story medical office buildings, net-leased retail centers, multi-family apartment complexes, senior housing facilities, and similar types of larger-scale commercial properties. 

There are a few other important aspects of the Delaware Statutory Trust ownership structure that are different from direct property ownership. Let’s take a closer look. 

Investor-Sponsor Relationship

A Delaware Statutory Trust is established by a Sponsor, who identifies and acquires the commercial property that’s held within the trust. Sponsors typically review many properties and complete all financial modeling, environmental reporting, appraisals, and other due diligence before selecting assets that will be held within trusts. Sponsors secure financing prior to the offering, and many also act as property managers once offerings are fully funded. Sponsors often elect to outsource management to third parties for multifamily apartment complexes or retail centers that require day-to-day oversight. In short, Sponsors source, acquire, finance, and package DST offerings, as well as provide all monthly or quarterly financial and annual tax reporting documents to DST investors. 

Fractional Ownership

Individual investors -- also called beneficiaries -- purchase fractional interests in the DST until the Sponsor’s original investment is displaced. Investors own a percentage of the property according to their investment amount, but no single owner can claim sole ownership rights of the asset(s) regardless of their investment amount. Beneficiaries receive regular monthly or quarterly distributions, when applicable, but they don’t have any authority or voice regarding the asset’s operation or performance. DST investors basically assume completely passive roles within the trust. 

1031 Exchange Eligibility and Real Property Ownership

Despite the co-ownership structure, the IRS views DST interests as direct real property ownership. Investors receive tax treatment as individual owners within the trust. It’s an important distinction because it provides 1031 exchange eligibility for DST interests. Investors who divest real assets can reinvest the exact amount of proceeds needed to satisfy 1031 exchange replacement property requirements and defer capital gains taxes on their relinquished assets. Lastly, despite being treated as real property owners, investors are shielded from asset liabilities through the DST ownership structure. 

DSTs also are subject to additional rules and limitations established by the IRS. These include a Sponsor’s inability to: 

• Receive new funds once the original offering closes 
• Renegotiate leases or enter into new lease agreements 
• Reinvest proceeds from the assets or retain any cash generated from its performance 
• Make major repairs on assets 

Closing Thoughts on Delaware Statutory Trust Ownership Structures 

The prepackaged nature of Delaware Statutory Trusts often makes them an attractive option for investors seeking to quickly complete 1031 exchanges. They also can be used to diversify real estate holdings since investors can purchase multiple equity interests in DST offerings of different asset classes and geographical locations. The ownership structure, meanwhile, can be beneficial to investors since Sponsors assume all the heavy lifting. The ownership structure also provides investor protection against bankruptcy and liens from creditors since beneficiaries don’t assume any personal liabilities within the trust. 

These are the primary reasons why the unique ownership structure of a DST can benefit accredited investors.