Delaware Statutory Trusts (DSTs) are investment opportunities in which a group of investors each owns an undivided fractional share of the trust’s properties, which may include any commercial assets. DSTs may own various properties, including retail, multifamily housing, office and industrial, and specialty assets like self-storage and student housing. DSTs are possible due to the statutory trust laws in Delaware, which allow trusts to determine the rights and responsibilities of the trust participants and to protect the trust's assets from debtors of any of the beneficiaries (shareholders).
The sponsor, typically a commercial real estate company, determines the targeted acquisitions and raises capital to purchase them. The sponsor is then responsible for leasing and managing the properties. From the investor perspective, DSTs can offer numerous advantages:
- The investment is pre-packaged, so the participant knows what the trust owns or intends to own. That fact allows investors to build a portfolio that can offer them the diversity they want using fractional interests in various commercial property sectors.
- Because the sponsor handles all tenant-related responsibilities, investors have a hands-off investment and no active participation in the properties.
- Since DSTs distribute income to beneficiaries on a scheduled basis, although distributions are not guaranteed, investors can access passive income. Since DSTs are pass-through entities, the trust’s earnings aren’t taxed at the corporate level.
- DST participants typically can own fractional interests in institutional-quality properties that they might not have the means to own individually.
- Investors can enter and exit DSTs using a 1031 exchange. This option allows investors to reinvest the entire proceeds from a property disposition, deferring capital gains taxes. In addition, because DST investments are typically flexible in size, investors may be able to execute a 1031 exchange and replace the entire value successfully.
DSTs have risks as well as rewards.
DSTs typically have holding requirements of five to ten years. Furthermore, investors should not expect that they can exit the trust early by selling their shares. In addition, DST investors must be accredited, and the minimum investment threshold may be significant. Still, investors may buy into DSTs to access property outside their individual reach.
The DST sponsor has the responsibility and authority to manage the operations without participation from the beneficiary owners. Investors must be willing to relinquish any influence over management. Since DSTs can’t raise additional capital after an offering closes, some substantial repair costs may adversely affect cash flow and anticipated income distributions.
Potential investors should evaluate the sponsor before deciding to participate. One consideration is whether the sponsor has a track record in the type of property that the DST is acquiring. Experienced sponsor organizations may perform better, particularly in challenging conditions. Another area that potential investors may want to investigate is the fee structure for the sponsor relative to others in the market. Higher fees could reduce potential income or final distributions.
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.
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.
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.
