How do Delaware Statutory Trust Sponsors Make Money?

How do Delaware Statutory Trust Sponsors Make Money?

Posted by on Jan 4, 2022

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A Delaware Statutory Trust, or DST,  is an investment option that allows investors to purchase fractional interests in a commercial property portfolio and seek to manage tax liability. Although none of the investors or the property needs to be in Delaware, a DST needs to have a Delaware resident as one of the trustees; however, the designated Delaware resident does not need to be an active decision-maker.

Delaware is attractive to financial companies for several reasons, one of which is the Delaware Business Trust Act, which the state passed in 1988. The legislation increased the freedom of trustees managing structured finance special purpose trusts and granted those trustees limited liability. In addition, Delaware does not charge ongoing fees to the Sponsors or investors in a DST, although the sponsors and trustees may levy administration fees.

Who is the Sponsor and What is Their Role?

The Sponsor is the person or company that creates and manages the trust, identifies and acquires the properties it holds, and administers the required distributions to investors. Usually, the Sponsor engages a master tenant who leases and maintains the assets in the trust to subtenants directly or through a property manager.

Sponsors earn compensation through fees and commissions that are included in the fees charged to investors. While all real estate transactions have costs, some investors think that the charges associated with DST investments are excessive. The Sponsor typically receives an acquisition (finders) fee for finding and acquiring assets in the trust. In addition, the Sponsor may charge an additional fee for negotiating the financing. Many also take asset management fees, and in some cases, the Sponsor claims any cash flow above a specified amount. Sponsors also generally receive a disposition fee when a property is sold.

Are DST Sponsor Fees Justified?

For any investor comparing the cost of fees for investing in a DST or similar vehicle to the cost of direct real estate purchase, the equation isn't simple or an equal match. Each individual needs to examine the value of the expertise provided by the Sponsor and then factor in the opportunity cost of the administrative time that the investor would have to factor in to replace the functions provided by the management team.

Aside from the time and expertise, the Sponsor may have access to assets and financing options that the individual investor would not. Therefore, a key consideration for the investor is access to adequate information about the costs of the DST. The Sponsor and trustees need to be fully transparent regarding the costs for the investor to maintain confidence in the management of the DST.

Who Should Invest in a DST?

Investors who want to create a customized portfolio with fractionalized ownership of commercial real estate, combined with avoidance of involvement with landlord responsibilities, may wish to investigate DST options. Potential benefits also include monthly income potential and tax advantages for the investor. However, as with any investment, DSTs have risks, and investors should consult their financial advisors.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time. No public market currently exists and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

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