Delaware Statutory Trusts (DSTs) can offer many advantages to investors. They can provide the potential for portfolio diversification by offering access to institutional-quality real estate.
But an investor can’t buy shares of a DST from stock exchanges. DSTs are considered private placement offerings. As such, investors should understand what private placements are and how they operate before directing cash toward these investment types.
Defining Private Placement Offerings
In its most basic sense, private placements consist of securities that aren’t registered with the Securities and Exchange Commission (SEC). Additionally, private placements are, well, private. They’re not sold through public means (like the New York Stock Exchange or NASDAQ). Rather, they’re mostly available through broker-dealers who are registered by the Financial Industry Regulatory Authority (FINRA).
According to FINRA, private placements are unregistered securities that are available only to a limited pool of investors. And unlike publicly traded securities, private placement offerings are regulated by SEC rules known as Regulation D, or Reg D. Under Reg D, private placement offerings don’t require as much disclosure as their public securities counterparts.
For the company or trust issuing the securities or interests, a private offering means less red tape. It also generates fewer costs. These factors mean the entity can quickly raise capital while remaining private. But for the investor, the Reg D non-disclosure elements could mean that less information is available when it comes to investment performance. This can make investment decision-making more difficult.
Where DSTs Fit In
As mentioned above, DSTs fall under the category of private placement offerings. DST shares are sold to a limited pool of accredited investors. To obtain DST interests, investors must go through a FINRA-registered broker-dealer or registered investment advisor.
DST investments are long-term and highly illiquid. Added to this, the Reg D non-disclosure issue means investors might not have the necessary information upfront to make the right decision concerning DST involvement.
As such, investors considering a purchase of DST shares should conduct due diligence on the following:
- DST sponsors and their track records
- The underlying real estate performance
- The real estate fundamentals (like asset type, class, and location)
- Tenant roster and lease rollover
- Anticipated return on investments
- Upfront and other costs (like escrow fees, environmental issues, or legal costs)
- Hold time and exit strategies
If the DST sponsor is unwilling to share any of the above, the investor should consider another investment opportunity.
More Than Real Estate
Delaware Statutory Trusts can offer investors a chance to invest in real estate. But as DSTs are private placements, investors need to understand that upfront information with such investments could be limited. As such, it’s important to ask questions and conduct research to help eliminate unknowns with any targeted DST investments.
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.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
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.
