The Sponsor plays a significant role in creating and managing a Delaware Statutory Trust (DST). In fact, the Sponsor is often the visionary, identifying the target property, acquiring it, arranging for financing, and then managing its operation. A Sponsor might be an individual, private equity firm, or other real estate investment company.
To begin with, the DST Sponsor will find the property or properties it wants to acquire. Then the Sponsor creates the trust, markets the offering to investors (beneficiaries), and manages the property. The Sponsor is also responsible for distributing income to the beneficiaries.
How does a DST work?
A Delaware Statutory Trust uses Delaware trust law to create a vehicle for fractional ownership of commercial real estate by a group of investors. A DST has certain potential advantages for investors. One of the notable benefits is that investors are only liable for their individual investment, not for the overall obligations of the trust. As a result, creditors may not seek recourse from the investors regarding the trust's debt. Similarly, beneficiaries may not encumber the trust’s property with liens.
Furthermore, DST investments may be straightforward destinations for investors seeking to execute a 1031 exchange to reinvest real estate sale proceeds to defer the payment of capital gains taxes. Often, a DST investor can choose the precise investment level they need to accomplish the exchange without searching for potential replacement property.
The Sponsor’s quality is crucial to success.
A DST Sponsor is a key determinant in the success of the investment, so potential beneficiaries should always conduct comprehensive due diligence on the Sponsor and the property. As noted, the Sponsor identifies the property, acquires, and finances it, and markets the opportunity to potential beneficiaries.
The Sponsor also negotiates a lease with a master tenant, which then subleases the properties within the trust portfolio. The Sponsor distributes operating income to the investors and makes all decisions concerning the property. However, the Sponsor may not raise additional capital once the offering is closed. The Sponsor is also prohibited from renegotiating leases or loans, except in specific circumstances, and may not buy additional assets.
What should you look for in a Sponsor?
One key factor to use in evaluating Sponsor qualifications is their track record. Investigate prior offerings from the potential Sponsor and learn how they performed. It's helpful if the Sponsor has previous experience operating a trust within a similar sector with comparable properties. Also, consider the Sponsor’s fees compared to other similar offerings. Higher fees can reduce the income that gets distributed to beneficiaries. Similarly, if the Sponsor overpaid for the property, the potential earnings for investors can be adversely affected.
While individual Sponsors may be highly professional and experienced, more significant operations may have more efficient operations and extensive records of success. A more prominent Sponsor may be able to offer a better fee structure and may benefit from economies of scale. A potential investor should have access to comprehensive information about the Sponsor’s previous offerings, provided directly by the Sponsor or by the broker-dealer offering the investment opportunity.
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.
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.
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.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
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.
