Delaware Statutory Trusts (DSTs) are entities that allow investors to earn income from underlying properties. As a trust, the DST naturally has a trustee, but its investment nature means that the trustee isn’t like those in other trusts. In fact, there’s more than one trustee involved in a DST.
In this article, Realized 1031 focuses on the DST signatory trustee, the key administrative figure that plays a critical role in compliance, trust integrity, and the smooth functioning of the DST. Keep reading to learn more about this party.
What Is the DST Signatory Trustee?
In a DST, Delaware law requires the presence of a trustee. Traditional trusts only have one trustee, but this is not the case with DSTs. Given the restrictions imposed by Revenue Ruling 2004-86 for 1031 exchange eligibility, there needs to be special consideration for who handles administration to ensure that the DST doesn’t turn into an active investment.
The signatory trustee is the entity that handles the business affairs of the DST, and it’s allowed to handle the administration of underlying assets to a degree. Most of the time, the sponsor takes on the signatory trustee role, or they may assign an affiliate to take on the mantle. Typically, there are two other trustees in the DST. The independent signatory serves for the benefit of the lender, while the Delaware trustee maintains a physical address in Delaware.
Responsibilities of the Signatory Trustee
The restrictions imposed by Revenue Ruling 2004-86 make the role of the signatory trustee more complex than just administration. Here are the aspects that they are responsible for:
- Asset Management: The signatory trustee oversees the daily operations and management of the underlying assets. However, this oversight is limited to only high-level supervision. Instead, the master tenant handles the bulk of responsibility to maintain the DST’s passive nature.
- Holding Legal Title: The signatory trustee holds the title of the DST’s properties, meaning the deed is recorded in the name of the trust of the trustee. They are also responsible for signing all other documents related to the DST.
- Decision Making: As part of the high-level management, the signatory trustee is responsible for making all operational decisions related to the property. These include hiring property managers, approving repairs and maintenance, and managing finances.
- Financing: The signatory trustee is also responsible for acquisition financing, acting as the sole borrower before the initial DST offering closes.
- 1031 Exchange Compliance: Finally, the signatory trustee must strictly adhere to IRS guidelines to ensure that the DST remains eligible for 1031 exchange treatment. This trustee is thus restricted from certain actions that would “vary the investment,” like raising new capital, renegotiating loans, or reinvesting sales proceeds.
What a Signatory Trustee Doesn’t Do
To better understand what the signatory trustee does, let’s also illustrate what they can’t do.
- Not Allowed to Directly Manage Properties: This is necessary to maintain the DST’s passive nature. Tenant relations, daily maintenance, and leasing are beyond the signatory trustee’s responsibilities.
- Not Allowed to Renegotiate or Form New Leases: These processes can be construed as active management, so the role is assigned to the master tenant.
- Not Allowed to Make Discretionary Capital Decisions: The signatory trustee can only distribute cash to investors or hold it in reserve. They cannot use income to acquire new property or make significant capital changes or repairs that would affect the value of the properties.
Significance of the Signatory Trustee for Investors
As a passive beneficial interest owner, an investor doesn’t have any direct control over the DST or the property operations. You are entirely dependent on the trustee’s competence and adherence to the trust agreement. As such, it’s important to learn the role of the signatory trustee and how they can ensure compliance and maintain tax-deferral benefits. Otherwise, you might choose a DST with a trustee that acts outside the strict limitations of the trust agreement. This could jeopardize your tax-deferral status and result in a major unexpected tax hit.
Wrapping Up: Delaware Statutory Trust Signatory Trustee
The DST signatory trustee plays a central role in the administration and compliance of this investment. The entity’s oversight ensures that the DST functions as intended, and its adherence to the management structure helps preserve the eligibility of the DST for tax-deferral benefits. For investors, understanding the role of this trustee is crucial. This knowledge helps you evaluate the trustworthiness and competence of the offering’s sponsor, ultimately protecting your investment for the long term.
Sources:
https://mf.freddiemac.com/docs/multifamily_legal_fyi_delaware_statutory_trust_august_2014.pdf
