Delaware Statutory Trusts are typically created and managed by professional real estate companies that act as the trust’s Sponsor. These companies leverage their expertise and experience to select and acquire various commercial real estate properties to be placed under trust and offered to investors as fractional ownership interests in the trust.
Delaware is a preferred jurisdiction to establish statutory trusts for a variety of reasons. The state has a longstanding reputation as the preeminent place to form a business organization – two-thirds of all Fortune 500 companies are incorporated in Delaware.1 The Delaware Statutory Trust Act was first enacted in 1988 and has been amended several times, most recently in 2022.
This act provides a comprehensive legal framework, along with unmatched flexibility, contractual freedom, and legal protection versus common law trusts. Filing the paperwork to set up a Delaware Statutory Trust isn’t an expensive proposition, but the true cost of establishing a DST depends on the underlying assets held within it.
Fees For Establishing a Delaware Statutory Trust
Another reason why many statutory trusts are filed in the State of Delaware is because the state does not impose any ongoing franchise taxes or annual fees. In order to form a DST, a sponsor must file a Certificate of Statutory Trust with the Delaware Division of Corporations. This certificate has a $500 filing fee.2
Although that’s all the financial commitment the state requires to establish a Delaware Statutory Trust, the heavy financial lifting is in the assets placed under trust.
Delaware Statutory Trusts are prepackaged investment opportunities. They may be appealing to 1031 exchange investors because the Internal Revenue Service views DST interests as like-kind to investment real estate, which makes DSTs eligible for 1031 exchange treatment upon entry and exit. Exchange investors can purchase beneficial interests in a DST in the exact amounts needed to satisfy their exchange requirements. The DST sponsor also has already lined up all assets for acquisition or obtained financing before the offering commences, which can help exchange investors meet their strict 1031 exchange timelines.
In order to provide these prepackaged investment opportunities, however, trust sponsors must find and acquire assets to be placed under trust. Costs involved in this process can vary greatly. The sponsor must scour markets to find commercial properties, perform extensive due diligence on prospective DST assets, arrange for asset financing, and potentially raise capital to complete acquisitions.
The Sponsor also performs all the work necessary to organize, maintain and operate the trust, as well as manage the commercial properties held under trust. The costs associated with those duties can be significant; however, DST investors carry much of that burden after the offering closes since common real estate transaction fees such as appraisals, legal, title, escrow, and loan origin fees are baked into the load on DST investments and are used to service the trust throughout its lifetime.
Putting it all Together
DST sponsors may evaluate dozens of commercial real estate assets in multiple geographical locations prior to acquiring the most promising assets and forming the statutory trust. Pre-acquisition activities include due diligence, negotiating purchase agreements, assembling equity capital, and asset financing such as bridge loans and long-term debt, and compiling all related marketing materials for the offering. They also may engage various third-party services to review a property’s financial performance and compile other asset-related information.
Establishing a Delaware Statutory Trust is a complex and rigorous process. Although the State of Delaware charges a minimal filing fee to establish the trust, there are many additional costs to be borne by DST sponsors prior to engaging a registered broker-dealer to open the trust for investment to accredited investors.
1Annual Report Statistics, Delaware Division of Corporations, https://corp.delaware.gov/stats/
2Certificate of Statutory Trust, Delaware Division of Corporations, https://corpfiles.delaware.gov/StattrustAug2018.pdf
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. It should also not be construed as advice meeting the particular investment needs of any investor.
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. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
