What is the Master Tenant of a Delaware Statutory Trust?

Posted Sep 21, 2023

Delaware Statutory Trusts (DSTs) are investment vehicles that are formed under the unique statutory laws in Delaware and allow multiple participants to own fractional shares of one or more properties. The participants (known as trust beneficiaries) each have a proportional right to the income and appreciation from the property held in the trust. This passive income is a significant attraction for many investors, as is the ability to enter and exit a DST investment using a 1031 exchange.

The Master Tenant (MT) in a Delaware Statutory Trust (DST) is an entity that leases the entire property from the DST and is responsible for operating the property. The duties include maintenance, keeping the property leased, collecting rent, and paying operating expenses. The MT typically sublets the property to individual tenants, which allows the DST to avoid the hassles of managing the property directly.

What is a DST Master Tenant?

Among several notable rules for DSTs is that the Trustee cannot enter into new leases or renegotiate existing agreements. To adhere to this requirement while maintaining the ability to manage the property effectively, the DST typically contracts with a Master Tenant, which leases the entire property. The Master Tenant can then execute subleases with the space's actual tenants. The MT handles the leasing of space, maintenance, rent collection, and the other typical responsibilities associated with the operation.

For example, suppose that the DST owns a 300-unit apartment building. The Master Tenant will lease the entire complex and then sublease the individual units to occupants. This separation between the Trustee and the lease negotiation is an IRS stipulation to preserve the eligibility of DSTs for entry and exit using a 1031 exchange. Since this utility is one of the incentives for investors to choose DST participation, it’s essential that they retain access to the 1031 tool. For investors seeking to identify and acquire qualified replacement properties within the deadlines a 1031 exchange requires, DSTs offer a convenient way to match the sales price quickly.

What are the investors responsible for?

DST investors are known as beneficiaries because they receive regular income distributions. However, these investors do not have any authority over the operations. The Sponsor who created the DST is responsible for the operations and income distribution. The Sponsor identifies and acquires the property or properties, arranges financing, and packages the offering to investors.

Does a DST have to be located in Delaware?

While DSTs take advantage of the Delaware laws governing trusts, the property does not need to be in Delaware. Neither do the investors or the Sponsor. Each DST must have a trustee located in Delaware, although that individual or entity does not need to have managing authority.

On the other hand, the investors must be accredited in order to participate. Since DST offerings are private placements, the SEC requires that these participants be eligible for accreditation by the Trustees. The beneficiaries should also understand that these are long-term investments that may be difficult to dispose of before the scheduled termination and that they lack input on operating decisions. 

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.

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.

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