Delaware Statutory Trusts (DSTs) are legal entities created using Delaware Trust laws to simplify ownership of fractional property interests. DSTs offer several potential advantages to accredited investors, including low minimum investment requirements, tax-advantaged income, and the ability to enter and exit the investment using a 1031 exchange.
The sponsor, usually a real estate company, creates the DST by identifying and acquiring the desired properties. Many DSTs focus on a particular sector, such as multifamily housing, office, industrial, or retail properties, and often purchase institutional-grade properties with attractive potential. This composition allows DST investors to purchase a fractional interest in assets they could not likely afford to buy on their own.
Investing in a DST is relatively simple, which is one reason why the option is increasingly popular for 1031 exchange replacement properties. While it can be challenging to identify and acquire individual properties within the timeline established for 1031 exchanges, a DST purchase can often be consummated quickly. The IRS considers DST shares as "like-kind" assets that investors can exchange for other property in a 1031 exchange.
Here are the essential steps to take as you pursue a DST investment:
- Find a qualified DST sponsor.
One of the critical aspects of DST investments is evaluating the sponsor. The sponsor is responsible for finding the target properties, structuring the deal, arranging financing, and attracting investors. The sponsor charges the DST a fee for their services, and the trust may also have other charges, such as broker commissions.
The potential investor is responsible for thoroughly assessing the sponsor's credentials to examine a DST investment's potential risks. The sponsor’s experience could mean the difference between a successful deal and a money-losing investment. Some things to look for when evaluating the sponsor are:
- Experience. How long has the sponsor been in the business, and what is their existing track record? This consideration includes whether they have previously enjoyed success and paid distributions as expected. This information is in the PPM (Private Party Memorandum). While past performance does not guarantee future success, a good track record speaks well for the sponsor.
- Fee structure. What is the fee structure? Fees can reduce the viability of a deal if they are too high.
- Property price. Given current market conditions, did the sponsor pay a reasonable price for the trust’s assets?
- Review the DST's properties and financials.
The primary source for financial and property information will be the PPM. The sponsor will estimate potential returns based on their own models, with projected occupancy and rent growth. A cautious investor will seek outside confirmation of the viability of the financial projections.
Another consideration in the financial projections is the reasonability of the sponsor fees. You can compare the costs disclosed to other offerings to decide if they are appropriate.
- Make an investment decision.
DST investments require that the investors are accredited because they are not suitable for all investors. The SEC suggests that potential investors draw their own financial roadmap before investing and evaluate their level of comfort with risk.
Consider whether the details of the DST offering match your personal investment needs. Keep in mind that these investments are illiquid, meaning that you may not be able to exit before the termination of the trust.
- Fund your investment.
The DST will have a minimum investment amount set by the sponsor. In many cases, the minimum investment amount is $100,000. However, deals with lower entry amounts are available based on the property's market value, location, and potential.
- Receive your DST interests.
DST owners (beneficiaries) receive regular (monthly or quarterly) distributions from the sponsor based on their percentage of ownership. If you own 10 percent of the trust shares, you receive 10 percent of the income distributed. Trustees may not reinvest income, which is divided between the participants (after expenses).
When the trust reaches its planned termination, the profit from selling the properties is also distributed among the participants. Typically, DSTs require five to ten years before maturity.
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.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
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.
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.
