Participating in a Delaware Statutory Trust (DST) is an attractive opportunity for some investors. For example, the investor might be interested in expanding their geographic reach, reducing their active management of property, or transitioning into a different commercial property sector. Each of these goals may be achievable by investing in one or more DSTs.
DST investments are also potentially viable means for investors to execute a 1031 exchange successfully. The tight deadlines for replacing property in an exchange transaction often contribute to the risk of failure. Because DST investments may be more easily accessible and faster to close, investors may seek this means of replacing property in an exchange.
What is a DST?
A Delaware Statutory Trust is a means of owning commercial property that is similar to some other fractional ownership opportunities. The DST name comes from the fact that these entities are authorized by Delaware laws allowing more flexibility than the common law trusts based in other states. A sponsor creates a DST. That entity is usually a real estate company. They identify, finance, acquire, and manage the trust's property or properties. The Sponsor also raises capital by finding participants, called trust beneficiaries. Participants must be accredited investors and should be aware of the lack of liquidity in DST investments.
A DST typically has a holding period of five to ten years. The Sponsor cannot raise additional capital once the offering is closed and may not purchase other property, renegotiate leases, or take on additional debt. Usually, the Sponsor works with a Master Tenant to manage the property. The Sponsor distributes income above a prudent reserve to the beneficiaries based on their pro rata ownership. Most DSTs focus on a particular sector within commercial property.
How can I assess a DST Sponsor?
First, consider whether the Sponsor has a good track record. If they have successfully offered and managed DSTs previously, that may indicate that they have the skill and experience to do so. Furthermore, investigate what sectors the Sponsor has previously handled. For example, if the Sponsor has experience in multifamily housing, but the offering under consideration is in retail or industrial space, that could be an issue to consider.
Larger, more established sponsor organizations may benefit from their size and may pass along financial savings to the investors. They may also have the resources to withstand temporary market concerns more effectively than small or individual service providers.
It’s a good idea for potential investors to examine the Private Placement Memorandum and compare the sponsor fees to other available offerings. These Sponsor costs can make a difference in the income distributed during the DST’s term and also in the proceeds available for disbursement to the beneficiaries when the property is sold. Also, compare the price the Sponsor paid for the property to similar assets. If the DST is sold through an independent broker-dealer, that broker will have completed its due diligence before agreeing to represent the opportunity.
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.
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.
