DSTs (Delaware Statutory Trusts) are among several attractive options for investors looking for fractional ownership of institutional-quality commercial real estate. Like an LLC or limited partnership, a DST has a sponsoring entity that identifies, acquires, and finances the property or properties. The assets go into the trust, and the investors (called trust beneficiaries) receive a proportionate share of ownership based on their investment amount.
While the DST is created under Delaware state law, specifically the Delaware Statutory Trust Act, the property does not have to be in Delaware. The DST offers relative flexibility for sponsors and legal protection from creditors for investors.
How should investors conduct their due diligence on DSTs?
The first step in researching a potential DST investment might be reviewing the Private Placement Memorandum (PPM). The DST Sponsor creates the PPM to outline the details, including the risks, rights of investors, and the expenses associated with the offering. Remember that the sponsor cannot raise additional capital in most cases once the offering is closed. The sponsor cannot reinvest in additional property or renegotiate leases or loan terms.
The PPM will disclose upfront fees like commissions, the premium over market value, and the total offering amount. In addition, it will include the sponsor compensation structure, which can influence the sponsor's approach to managing the trust’s property. It will also declare the holding period for the trust and include the terms of the Master lease.
How long are DST holding periods?
The holding period for a DST can be as short as three years, but many are for seven to ten years. It's essential for investors to be aware of the long time frame and that there is no viable secondary market for DST shares. That’s one of the reasons that only accredited investors can participate, and the minimum investment threshold is typically $100,000. The Trust sponsor will distribute income to the investors during the investment period minus prudent reserves. When the Trust property is sold, the proceeds are distributed to the beneficiaries based on their ownership percentage.
What are the advantages of investing in DSTs?
Every investment has risks, including DSTs. However, an investor may be attracted to a DST for several reasons:
- The investor may be able to obtain a fractional interest in properties and projects that they could not purchase using only their own resources. DSTs often focus on a specific real estate sector, owning one or more assets in a sector, including office, industrial, retail, or multifamily housing. While the DST is often limited to one sector, an investor can achieve sector diversification by participating in more than one DST offering. Finding appropriate DSTs may be easier than identifying individual properties the investor can purchase individually.
- DSTs can be attractive options for completing a 1031 exchange. One of the challenges for investors executing a 1031 exchange is finding appropriate replacement properties within the IRS deadline. If the investor fails to identify potential replacements in 45 days following the original property sale or fails to complete the transaction within 180 days, the 1031 exchange won’t qualify for deferral of the capital gains. This tight deadline can be a substantial concern for investors. On the other hand, conducting a 1031 exchange into a DST often allows the investor to complete the exchange quickly and to ensure they have the necessary investment level to avoid taxable boot.
Since investors can use a 1031 exchange both at entry and exit from a DST, this approach may allow the investor to continue deferring the capital gains taxes from each investment. Sequential use of the 1031 exchange and selection of DSTs for replacement properties may also support estate planning.
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.
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.
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
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.
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.
There is no guarantee that the investment objectives of any 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 it will be able to pay or maintain distributions, or that distributions will increase over time.
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.