We’ve written many blogs concerning Delaware Statutory Trusts (DSTs) and potential investment advantages. DSTs are real estate investment vehicles that buy and manage real estate. Through this process, DSTs can offer investors access to institutional properties with a relatively minimal investment.
Investors can acquire a beneficial interest in a DST through a 1031 exchange. In 2004, the IRS ruled that DST interests could be treated as direct property ownership for tax purposes. The investor holds that interest in the trust until the DST goes full cycle, sells its real estate holdings, and terminates.
But can an investor exit a DST before a full-cycle event? It is possible, in theory. But it’s also very difficult and complex to do so for the following reasons:
Lack of public/secondary markets
DST interests aren’t traded on public markets. Rather, they’re private securities that are meant for long-term holds. Realized Holdings did develop such a secondary market for DST shares in 2019, and continues operating it to this day. But this is the exception to the general rule that DST shares are illiquid and difficult to sell before the trust terminates.
A prohibition against resale
DST sponsors make their offerings with the assumption that investors will stay with the trust for the long term. This means a minimum hold time of five years. DSTs are in the business of buying, selling, and managing real estate. As such, sponsors need assurance that they’ll have the capital handy to meet the trust’s goals. If an investor divests their DST shares, this could change the capital stack.
Because of this, DST sponsors place restrictions on the resale of beneficial interests. They can either prohibit the sale outright or require approval from the investor for divestiture.
Laws, laws, and more laws
Again, DST shares are not publicly traded securities. Rather, they’re offered (and purchased) as private securities. Because of this, investors selling their DST beneficial interests need to comply with certain security laws. One of these is the Securities and Exchange Commission’s Regulation D, which puts a limit on how much private investments can sell for.
There are several takeaways from the above discussion. First, those interested in a DST investment should assume that they’ll be involved with the trust for several years. Second, investors should understand that DSTs are illiquid, with capital tied up through the DST’s lifecycle.
And finally, while divestiture is possible before a DST goes full cycle, it can be difficult to achieve. Because of this, individuals should fully understand both advantages and disadvantages of DSTs before committing funds to this particular investment vehicle.
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.
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.
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.
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.
