A DST, or Delaware Statutory Trust, is a trust created under Delaware state law that owns property (the trust, the investors, and the properties can all be located outside of Delaware). A DST often provides individual investors with access to properties they may not be able to obtain individually. The DST Sponsor is the individual or company that creates the trust to hold the assets and takes care of the issuance of the shares to investors.
Typically, the Sponsor will engage a master tenant to lease the DST properties, since as a 1031-eligible asset, DST properties must be passive investments. The master tenant manages the properties via subleasing to other tenants.
How Does a DST Work?
Suppose that a DST owns a multifamily property with 300 units. The master tenant leases the apartment complex from the DST Sponsor and manages the property, making payments to the DST and collecting lease payments from the occupants in return. Each investor in the trust gets a share of any net operating income based on their ownership. This formula is the same if the underlying property is an office building or belongs to some other sector.
Pros and Cons of DST Investments
Potential advantages to DSTs include these:
- DSTs are recognized by the IRS as direct ownership of real estate, making them 1031 exchange-eligible on entrance and exit.
- Since DST investors own a small fraction of a large property, they can own higher quality, more considerable assets than they could obtain individually.
- Because the Sponsor does the due diligence and acquires the properties; this may help the investor avoid missing a deadline or skipping a critical step in the process.
- Due to flexible purchasing, a participant can often customize the investment amount to precisely match what they need to spend to fulfill an exchange requirement.
Risks and disadvantages of participating in DSTs include these:
- DST investments rely on the execution of Sponsors and master tenants. Failure by one of those individuals can adversely affect the investor.
- Changes in tax laws can reduce the benefit of DSTs and other tax-advantaged investments and may not be predictable.
- DST fees may be higher than other investment types.
- DSTs are considered illiquid, with holding periods that are typically five to ten years. Because a DST can't raise additional capital or add new investors, major property expenses or higher vacancies can cause cash flow to tighten.
Does the Sponsor Matter?
DST Sponsors vary considerably in size and sophistication, and investors may want to consider the strength and track record of the DST Sponsor when choosing an investment. Larger Sponsors may have an advantage in gaining economies of scale in operations that can reduce costs for their investors and possibly obtain more favorable pricing on loans.
More importantly, investors should evaluate the level and nature of communication from the Sponsor to the investor group to decide whether the updates are adequate for their comfort level. In particular, verify that the Sponsor regularly provides required documents to investors in advance of IRS deadlines so that participants can file tax returns timely and without having to chase down needed materials.
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.Past performance is no guarantee of future results. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.Costs associated with a real estate 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.TIC properties employ professional asset and property management, so while TIC co-owners vote on major issues, they do not have direct say over day-to-day property management situations.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.