Delaware Statutory Trusts (DSTs) are often attractive to investors who want access to significant commercial real estate (CRE) assets similar to those institutional investors own. A DST is created by a sponsor, who identifies and acquires the targeted assets. The sponsor then markets the offering to investors and contracts with a master tenant to manage the property.
The DST Sponsor needs a master tenant because DST rules prohibit the sponsor from renegotiating leases or loans relative to the assets. While most DSTs focus on a specific sector of CRE, such as multifamily housing, office, or retail, each DST may own several properties. DST rules require the trust to regularly distribute at least 90% of its income to the beneficiaries. Since DSTs are pass-through entities, the trust does not pay taxes on the income. Each shareholder (beneficiary) pays income tax at their individual rate.
DSTs have a predetermined life. Typically, the period is agreed on from the outset and is often five to ten years. Some DSTs instead have termination dates that depend on achieving specific goals. Either way, the sponsor will notify the trust beneficiaries when the disposition phase begins. Only after the disposition of held property does the DST investor receive the return of their principal.
It’s essential that investors understand that these are not liquid investments. Of course, DSTs, like all other investment vehicles, can potentially lose value. Prospective investors should carefully review the PPM and evaluate the sponsor’s qualifications and track record.
DST investors can choose the following actions as they prepare to receive their payout from the trust:
Using a 1031 exchange to both enter and exit a DST is one of the distinct advantages of the investment vehicle. Real estate investors can enter a DST using a 1031 exchange. Investors may sell a direct investment and use a 1031 exchange to invest in a 1031. Some of the advantages of doing so include:
DST investors may enjoy access to fractional ownership of properties they could not afford individually. They also benefit from professional management of the property and the potential for reliable, tax-advantaged income and capital appreciation.