What Are the Laws and Other Legal Considerations for DST Investments?

What Are the Laws and Other Legal Considerations for DST Investments?

Posted by on Oct 27, 2021

legaliStock-1278728870

Plenty of information is available to investors interested in putting their monies into Delaware Statutory Trusts (DSTs). Such information includes what they are, how they operate, and their advantages and disadvantages. 

What might not be quite so well-known are the laws and requirements that DSTs must follow. If you’re considering investing in a Delaware Statutory Trust, don’t just assume that the entity and its trustees/sponsors are following all of the regulations. Much as you would perform due diligence on any investment, it’s important to take the time to do the same with your target DST.

Part of your research should focus on whether your target DST adheres to the following.

Delaware Residency

This requirement should be obvious, given the fact that the trust has “Delaware” right there in the name. However, not all of the sponsors or trustees are required to live in The First State. Only one Delaware-residing trustee is necessary when it comes to forming the entity, and filing a certificate with Delaware’s Office of the Secretary of State.

Capped Investors – and Investor Funds

One thing to know about a DST is that there is a certain period of time during which the entity can raise funds and find investors. This is known as the offering period, and it’s the window during which you can take a look at the trust’s underlying asset/assets and their potential performance(s). 

But once that offering period closes, so does your ability to invest in the DST. Basically, the sponsor or trustee can’t take on any additional investors. Nor can the trust raise or receive any additional funds.

This isn’t a problem if the DST is headed by a seasoned sponsor who understands how much will be used to buy and maintain real estate assets. But what happens if unanticipated expenses crop up and the DST runs out of money? In this case, the trust – and you, the investor – are out of luck. The sponsor will be seeking out the best way to dissolve the DST, and you’ll have to take that loss.

No Bankruptcy, Please

Speaking of loss, DSTs are considered “bankruptcy remote.” In other words, they are set up in a way that protects you, the investor, from incurring the trust’s debt or financial obligations. In return for that protection, you hand over the real estate acquisition, management, and operation duties to the sponsor. As such, be sure that the sponsor’s track record and experience in these matters is sound.

No Renegotiation

Finally, it’s important to understand that the DST trustee can’t renegotiate loan terms taken out by the entity. The only exception to this is if a tenant has defaulted on its lease, or has filed bankruptcy.

Along those lines, your sponsor might end up having to restructure a lease in the event of tenant default or bankruptcy, unless a master lease is in place to handle this issue. This, in fact, is the only time during which a sponsor can renegotiate a lease with a tenant. Under other circumstances, the sponsor can’t be involved with any lease negotiations with the tenants.

Adherence to Holds

While there are no hard and fast holding periods when it comes to the trust’s time of existence, the general rule of thumb is that DSTs hold onto real assets for anywhere from five to 10 years. If the trust seems to deviate from this timeline, be sure to ask the sponsor why this is the case. 

Understand the Requirements

While you, as an investor, follow different conditions when it comes to DST investments, it’s important you know that the DST you’re considering is adhering to the many rules, regulations, and requirements that are part of its existence and operation. This is an important part of the due diligence process of DST investments.

 

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. 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. There is no guarantee that the investment objectives of any particular program will be achieved. 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. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time.

Download The Guide To DSTs

The Investor's Guidebook To DSTs
Download eBook

 


The Investor's Guidebook To DSTs

Download The Guide To DSTs

See if Delaware Statutory Trusts are right for you.

By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received.