Who Can Invest in a Delaware Statutory Trust?

Posted by Clay Schmidt on Nov 12, 2021

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A Delaware Statutory Trust (DST) is a sophisticated investment option that offers individual investors access to fractional ownership of commercial properties they would not likely be able to own otherwise. The assets held by DSTs are typically similar to properties owned by large institutional investors, including REITs, insurance companies, and retirement funds. Individual investors may also appreciate the eligibility of DST offerings for 1031 exchange transactions, both for entry and exit.

Does the Property or the Investor Have to be in Delaware?

The investors and the property are not required to be in Delaware (or even be able to locate it accurately on a map), although the DST does need to have a Delaware resident as one of the trustees; that individual does not have to be an active decision-maker.

Delaware has long been a leader in trusts, and the state adopted the Delaware Business Trust Act (now referred to as the Delaware Statutory Trust Act) in 1988. The legislation increased the freedom of trustees managing structured finance special purpose trusts and granted those trustees limited liability.

Since the DST is a separate entity from the investors in it, assets owned by the investors are not typically exposed to liabilities of the trust. In addition, the shares are considered beneficiary interests, and the IRS regards them as direct property ownership, which supports the 1031 exchange eligibility.

DSTs Can be Risky

Some of the risks associated with a DST mirror those of other real estate investments—interest rates, lack of liquidity, market factors, and asset degradation. However, DSTs carry other exposures, like added fees, regulatory changes, and execution failures. Any of these can negatively affect the potential for gains.

DST Investors Must Be Accredited

The Securities and Exchange Commission requires that investors in DST offerings be “accredited investors.” The term is defined in SEC Regulation D, Rule 501, and is designed to protect unsophisticated investors from potential losses. For investments to be available beyond the group designated as accredited, the sponsors of such offerings would need to disclose far more information than that required for offerings to the accredited group.

An accredited investor is anyone who:

  • Has an earned income of more than $200,000 (or $300,000 with a spouse or equivalent) in each of the two most recent tax years) and anticipates the same in the current year, or
  • Has a net worth (either alone or jointly with spouse or equivalent) over $1 million, not including the value of the person’s residence, or
  • Holds a current Series 7, 65, or 82 license

 

Unaccredited Investors Can Consider a TIC Investment

For an unaccredited investor, one alternative to consider is a Tenant-In Common ownership structure. There are some similarities between the DST and TIC and some notable differences. While a DST investment is passive, TIC ownership is not—significant decisions require the unanimous agreement of the co-owners, which is one good reason why the maximum number of investors is 35. Additional limits can be imposed by agreement with lenders if the project is financed. In contrast, DSTs have no externally imposed maximum number of investors.

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.

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