As you enter a Delaware Statutory Trust (DST) for tax-deferral and diversification benefits, you’ll learn lots of specifics, like the concept of the master tenant and the DST trustee. You may find these terms confusing because of their similarities, but the master tenant and trustee are two totally distinct parties. Knowing the differences helps you understand how your investment is managed and protected.
In this article, Realized 1031 showcases the distinctions. Keep reading to learn more about master tenant vs. Delaware trustee roles!
DST Basics: Why the Distinction Between Master Tenant and Trustee Is Important
As you’re likely aware, a DST is a legal entity and an investment vehicle formed to own one or more income-generating properties. Investors enter by purchasing beneficial interests, and you can do so with proceeds from a 1031 exchange. In exchange, the DST distributes revenue from the assets to the interest holders.
DSTs are not self-operating. To do so would be in violation of Revenue Ruling 2004-86, which would remove the tax deferral eligibility of the DST. Maintaining the passive nature of the investment means that the trustee has to assign a master tenant to handle the operations. These are the two key players who ensure that the DST structure remains compliant and functional.
The Role of the DST Trustee
The DST trustee acts as the legal anchor of the DST, the entity that primarily holds the title of the assets under the trust. The trustee is also responsible for ensuring compliance with DST requirements and maintaining the trust’s good standing. As such, it’s common for the sponsor to also serve as the DST trustee, but they can also assign an affiliate party to carry out this role.
The most important thing to keep in mind is that the trustee’s role is not managerial — this party is only focused on administration and legal compliance. The managerial role is assigned to the master tenant.
The Role of the Master Tenant DST
The master tenant is a special-purpose entity that handles the operations and management of the underlying DST assets. This party holds the master lease and leases property under it, along with handling lease negotiations, since the trustee isn’t allowed to do so. Besides handling leases, the master tenant performs the following roles.
- Rent Collection
- Tenant Management
- Oversight of Maintenance and Operations
- Payment of Expenses
- Execution of the Business Plan for the DST Investment
In essence, the master tenant acts like the property manager who oversees all the properties involved in the DST. This structure shields investors from active management duties, preserving the DST’s “passive” nature required under IRS rules.
However, the master tenant’s powers are limited. This individual cannot refinance, renegotiate major leases, or sell the property. These are actions that would violate DST restrictions and disqualify it from 1031 eligibility. These decisions rest with the sponsor or trustee under narrowly defined conditions.
Wrapping Up: Understanding Master Tenant vs. Delaware Trustee
The master tenant and DST trustee are two distinct parties in DSTs, but their collaboration is critical to the success of the investment. As the trustee provides structural legitimacy and continuity, the master tenant takes care of the operations and management of the underlying DST assets. These roles complement each other, ensuring that the investment remains compliant, stable, and profitable.
Sources:
https://www.hellodata.ai/help-articles/what-is-a-master-lease-agreement-in-real-estate
