Delaware Statutory Trusts (DSTs) hold a lot of promise, especially for investors who want benefits like tax deferral and access to income from institutional-grade assets. However, before entering one, it pays to be informed regarding all aspects of this investment.
One area to look into is the life cycle of the DST. Unlike other investments, the structured nature of DSTs means there are definitive phases that define the trust’s duration, operation, and eventual dissolution. For 1031 Exchange investors, having an idea of the DST investment stages helps with proper planning and avoiding unwanted taxable events. Realized 1031 shares the specific phases of the DST life cycle to help you stay informed. Keep reading to learn more.
1. Formation and Asset Acquisition
DSTs begin long before you see the offering. The first stage commences when the sponsor begins identifying and acquiring income-generating properties. These assets will eventually become the portfolio of the DST.
Often, sponsors look for institutional-grade assets like multifamily communities, industrial facilities, or long-term net-lease rental properties. Due diligence is extensive and takes a long time. However, once the sponsor has determined the right assets, it begins structuring the DST and outlining the private placement memorandum. As a result, by the time the DST is marketed towards investors, the underlying structure is already stable and under professional management.
2. Offering
The offering period begins when the sponsor starts marketing DST offerings. This window is when investors can subscribe to the trust by purchasing beneficial interests. In addition, this phase is the most critical in the 1031 Exchange DST timeline, especially since the like-kind exchange has a 180-day deadline. The pre-packaged nature of the DST makes it easier for investors to match value and reinvest all their proceeds.
On your end as an investor, you’ll need to work with your qualified intermediary or a broker-dealer to find DST offerings. Once you’ve identified suitable DST offerings, it’s best practice to examine the PPM, financial projections, and risk disclosures to finalize which DST you’ll choose to finish the exchange.
3. Operational Period
The longest phase of the DST is its operational period, which begins once the offering period is closed. This stage is the most productive, as this is when the investment earns income that will later be distributed to investors.
The IRS mandates DSTs to remain passive in nature, so investors have no control over the operational aspects of the DST for the entire holding period. It’s up to the sponsor to handle daily management and administration. This fact makes it even more important for investors to choose experienced sponsors. Otherwise, an inexperienced sponsor may implement strategies that result in underperforming assets, putting your investment at risk.
4. Maturity
While this isn’t an established phase in a DST, the maturity stage begins a cascade of events leading up to the end of the full-cycle event. The sponsor begins evaluating whether the market conditions are favorable for a sale or whether maintaining the asset is the more suitable choice. The sponsor may look at the following factors to determine the next steps.
- Condition and performance of the properties
- Market demands and pricing trends
- Financing maturity dates
- Projected returns of alternative strategies
When the sponsor determines that the timing is right, the DST moves toward liquidation.
5. Disposition and Liquidation
At last, the DST reaches the end of its life — the full-cycle event. This is the end of the holding period, and five to ten years have passed since the initial DST offering was closed. The sponsor begins listing the properties for sale, negotiating, and eventually selling the assets. Once the sale is over, the sponsor distributes the proceeds plus the initial invested capital back to the investors.
At this point, the DST has dissolved. The next step is up to the individual investor.
6. Exit
After the DST hold period and exit, 1031 Exchange investors have two choices: reinvest the proceeds to continue tax deferral or cash out. The latter choice is a taxable event, and you’ll be liable for all the deferred capital gains taxes from the previous exchanges.
If you choose to reinvest again, it’s important to inform your sponsor and qualified intermediary ahead of time. That way, you don’t receive the proceeds directly, which is prohibited in 1031 Exchanges. Then, you can work with your qualified intermediary to find another DST that aligns closely with your investment goals.
Wrapping Up: Delaware Statutory Trust Life Cycle
Understanding DST investments requires you to be familiar with the life cycle of these investments. From the sponsor’s acquisition of high-quality real estate to the eventual liquidation and reinvestment opportunities, each phase comes with its own key considerations. Your in-depth knowledge of these intricacies helps you set expectations and prepare in advance to preserve your tax-deferred status.
Sources:
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
