A Delaware Statutory Trust (DST) is a prepackaged, professionally managed, passive real estate investment option for individual investors. DSTs provide eligibility for taxpayers to enter and exit using the IRS Section 1031 exchange and sometimes provide tax-advantaged income. The DST assets might include multi-family housing, industrial facilities, office complexes, and other commercial real estate choices. In some cases, the assets may be of higher quality.
One of the reasons why DSTs carry the Delaware nomenclature is that Delaware is one of the few states with a statutory trust law, which delegates more control to the parties of an agreement. In contrast, most states use common trust laws, which contain outdated rules. Statutory trusts allow greater privacy and authorize the specifics of the trust agreement to remain unfiled, maintaining information about the contract details within the circle of the parties to it.
Who Are the Trustees?
A DST must have a trustee based in Delaware but can also have a managing or signatory trustee elsewhere. If the signatory trustee is already in Delaware, there is no need for an addition. There may also be an independent trustee protecting the interests of the beneficiaries of the trust and the lender.
The signatory trustee hires the Sponsor, who manages the trust. The trust owns the assets, while the beneficiaries (investors) purchase fractional interests in the trust. The investors do not influence the operations of the trust, which the Sponsor controls.
What Limitations Are Placed on the Trustees?
While the Sponsor makes the business decisions without input from investors, the IRS has several rules they must follow, including these:
- Income from the DST operations can't be used to purchase additional property or to improve existing assets. Although sponsors can use the revenue to pay for essential repairs and maintenance, they must distribute all other cash flow to the beneficiaries rather than reinvesting it into the trust.
- After the closing of the trust, it cannot accept any new investors.
- Sponsors can’t renegotiate loans or leases for better terms. There may be exceptions allowed if tenants go bankrupt.
- If there is a master tenant, that entity can create subleases with other tenants and property management contracts. The master lease arrangement may offer more flexibility than a sponsor or trustee-managed structure in some DST offerings.
Does the DST Structure Protect the Investors?
Since a DST is a legal entity set up apart from the beneficiaries, the investors are not exposed to the trust's debt or financial obligations. The trust owns the asset or assets, and the investors own fractional shares of the actual trust. Keep in mind that the trust investors have no say in the operations; they only receive distributions if there is income to distribute.
Since DSTs are considered illiquid investments (with holding periods of between five and ten years in many cases), they are usually viewed as suitable for long-term investors. While the structure shields the investors from some added risks, an investor who might need earlier access to the funds invested should consult an advisor about other options.
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. 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. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital.