Delaware Statutory Trust (DST) Investments
What is a Delaware Statutory Trust (DST)?
A Delaware statutory trust (DST) permits fractional ownership where multiple investors can share ownership in a single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands of an experienced sponsor-affiliated trustee.
Why do sophisticated investors choose DSTs for their 1031 Exchange?
Institutional-quality property
Most real estate investors can’t afford to own multimillion-dollar properties. DSTs allow investors to acquire partial ownership in properties that otherwise would be out of reach.
No management responsibilities
The DST is the single owner and agile decision maker on behalf of investors.
Estate planning
All 1031 exchange investments receive a step-up in cost basis so your heirs will not inherit capital gain liabilities, and provides them with professional real estate management versus the burden of hands-on management.
Lower minimum investments
DSTs can accommodate much lower minimum investments, whereas 1031 exchange minimums often are $100,000.
Limited personal liability
Loans are non-recourse to the investor. The DST is the sole borrower.
Diversification
Investors can divide their investment among multiple DSTs, which may provide for a more diversified real estate portfolio across geography and property types.
1031 Exchange insurance policy
If for some reason the investor can’t acquire the original property they identified, a secondary DST option allows them to meet the exchange deadlines and defer the capital gains tax.
Eliminate 1031 Exchange boot
For investors who have already acquired a replacement property but still have remaining funds from their 1031 exchange, Delaware Statutory Trusts (DSTs) can serve as a fractional ownership option to invest the residual capital and fully defer capital gains taxes.
Continued 1031 Exchanges
The DST structure allows the investor to continue to exchange real properties over and over again until the investor’s death.
How does debt work with DSTs?
When investors acquire debt as a beneficiary of a DST, they neither have to qualify for the loan nor take responsibility for the loan. The investors do not have to submit financial background information to the mortgage lenders or worry that some unexpected hurdle will block their financing. The loan will not appear on their credit scores. And in the unlikely event that the loan becomes delinquent, the delinquency will not affect the investors’ credit.
Instead, the investors receive many loan benefits. The debt amounts increase their investment values. The loans meet the 1031 exchange debt reduction principal requirements. And can apply their portions of the loan interest payments to their tax write-offs each year.
Investors take no responsibility for the loan
Investors do not have to submit financial background information to the mortgage lender
The loan will not affect investor credit or appear on credit scores
The debt increases investor investment values
What should DST investors expect?
Income Generation
DST investments can offer the opportunity to generate a steady stream of passive income through the net cash flow from the underlying properties. These properties are typically professionally managed, reducing the day-to-day responsibilities of direct property ownership.
Consistent Cash Flow Potential: Benefit from regular distributions derived from the lease payments of diverse commercial real estate assets.
Diversification Across Property Types: DSTs hold fractional interests in a variety of property types, such as multifamily apartments, industrial warehouses, retail centers, and medical facilities, potentially diversifying your income streams.
Professional Management: Enjoy the benefits of experienced property management teams handling tenant relations, maintenance, and operational aspects.
Tax Benefits
DSTs offer several compelling tax advantages that can significantly enhance your investment returns:
1031 Exchange Eligibility: One of the most significant benefits is the ability to defer capital gains taxes through a 1031 exchange when selling investment property. Investing in a DST can be a strategic move to seamlessly roll over your gains into a new investment without triggering a taxable event.
Depreciation Deductions: As a beneficial owner in a DST, you may be eligible to deduct your pro-rata share of the property's depreciation, potentially offsetting other taxable income.
Estate Planning Advantages: DST interests can be included in your estate planning strategies, potentially offering flexibility in wealth transfer.
Value Appreciation
While income generation and tax benefits are key advantages, the potential for long-term value appreciation is another compelling aspect of DST investing.
Exposure to Diverse and Potentially Growing Markets: DSTs often invest in well-located properties within markets with strong growth potential.
Institutional-Quality Assets: Gain access to institutional-grade real estate that might otherwise be inaccessible to individual investors.
Potential for Capital Appreciation: As the underlying properties appreciate in value over time, your fractional ownership can reflect this growth potential.
Management Oversight and Investor Communication
Investing in a DST involves entrusting the management of the underlying properties to experienced real estate professionals or sponsors. This hands-off approach is a significant benefit for many investors, allowing for passive income generation without the burdens of direct property management.
Professional Management and Oversight: Sponsors handle the day-to-day operations, leasing, and property maintenance, leveraging their expertise to optimize property performance.
Periodic Performance Reports: Expect to receive regular updates detailing the financial health of the properties, including occupancy rates, income, and expenses.
No Capital Calls: DSTs are generally structured as fully funded investments, meaning that the initial investment covers all anticipated capital needs. Investors typically do not face future capital calls for unforeseen circumstances or property improvements. This can provide a greater sense of financial predictability.
Delaware Statutory Trust (DST) Investments: Frequently Asked Questions
-
A Delaware Statutory Trust (DST) is a legal entity created under the laws of Delaware that allows multiple investors to pool their funds to invest in larger real estate assets. It's a separate legal entity that holds title to the property, and investors hold beneficial interests in the trust rather than direct ownership of the real estate. This structure is often used for 1031 exchanges,
-
When you invest in a DST, you purchase a beneficial interest in the trust that owns a specific property or portfolio of properties. As a beneficial owner, you are entitled to a proportionate share of the income generated by the property (e.g., rental income) and any potential appreciation in its value. The trust is typically managed by a sponsor who handles the day-to-day operations of the property, such as property management, leasing, and maintenance.
-
DSTs can hold a variety of commercial real estate property types, including:
Multifamily apartment buildings: Offering consistent rental income streams.
Net-leased properties: Single-tenant properties leased to creditworthy tenants on long-term leases (e.g., retail stores, fast-food restaurants).
Industrial warehouses: Benefiting from e-commerce and logistics growth.
Healthcare facilities: Including medical office buildings and assisted living facilities.
Self-storage facilities: Providing stable income and relatively low management intensity.
Hospitality (Hotels): Can offer higher returns but may also carry more risk and be more management-intensive.
-
1031 Exchange Compatibility: DSTs are a popular option for investors looking to defer capital gains taxes through a Section 1031 exchange.
Diversification: Investors can gain exposure to larger, institutional-grade properties that they might not be able to afford on their own, potentially diversifying their real estate portfolio.
Passive Income: DST investments typically generate passive income through regular distributions.
Professional Management: The sponsor handles all property management responsibilities, freeing up investors from day-to-day tasks.
Lower Investment Minimums: Compared to directly purchasing a large commercial property, DSTs often have lower minimum investment amounts.
-
Lack of Control: Investors have limited control over the management and operational decisions of the property.
Illiquidity: DST interests can be difficult to sell before the property is sold or refinanced. There is no guarantee of a secondary market.
Market Risk: The value of the underlying real estate can fluctuate due to market conditions, economic downturns, or changes in local demand.
Sponsor Risk: The success of the investment depends heavily on the experience and competence of the DST sponsor.
Fees and Expenses: DST investments involve various fees, including acquisition fees, management fees, and disposition fees, which can impact returns.
Leverage Risk: Many DSTs utilize debt financing, which can amplify both potential returns and potential losses.
Tax Risks: While DSTs facilitate 1031 exchanges, there are specific rules and regulations that must be followed to maintain tax deferral. Changes in tax laws could also impact the benefits.
-
Are seeking passive income.
Want to diversify their real estate holdings.
Are looking for a 1031 exchange replacement property.
Prefer professional property management.
Understand and are comfortable with the risks associated with illiquid real estate investments.
-
An accredited investor is an individual or entity that meets certain income or net worth requirements set by the Securities and Exchange Commission (SEC). Generally, an individual must have either:
An individual income of more than $200,000 per year for the last two years (or $300,000 together with a spouse) and a reasonable expectation of the same for the current year.
A net worth of more than $1 million, either alone or together with a spouse, excluding the value of their primary residence.
-
A DST is typically structured with a sponsor who identifies, acquires, and manages the property. The sponsor then offers beneficial interests in the trust to investors through a private placement memorandum (PPM). The PPM provides detailed information about the property, the sponsor, the fees, the risks, and the terms of the investment. A trustee holds legal title to the property on behalf of the beneficiaries (investors).
-
Distributions are typically paid monthly or quarterly from the net operating income of the property after deducting expenses and any reserves. The amount of the distribution depends on the property's performance and the investor's percentage ownership in the DST.
-
Before investing in a DST, investors should conduct thorough due diligence, which may include:
Reviewing the Private Placement Memorandum (PPM): This document contains crucial information about the investment.
Evaluating the Sponsor: Assessing the sponsor's experience, track record, and financial stability.
Analyzing the Property: Examining the property's location, tenant profile, lease terms, and market fundamentals.
Understanding the Financial Projections: Reviewing the projected income, expenses, and potential returns.
Assessing the Fees and Expenses: Understanding all costs associated with the investment.
Consulting with Financial and Legal Advisors: Seeking professional advice to ensure the investment aligns with their financial goals and risk tolerance.
-
Yes, like any real estate investment, there is a risk of losing money in a DST. The value of the underlying property can decline, rental income may be lower than projected, and the property may not sell for the anticipated price. Additionally, the illiquidity of DST interests can make it difficult to exit the investment if needed.
-
When the property held by the DST is sold, the net proceeds are distributed to the beneficial owners (investors) according to their percentage ownership. If the investor participated in a 1031 exchange to acquire their DST interest, they may need to reinvest their proceeds into another like-kind property to continue deferring capital gains taxes.
-
The typical holding period for properties held in DSTs can vary but is often between 5 to 10 years. However, this is not guaranteed and can be influenced by market conditions and the sponsor's strategy.
-
Yes, DST investments are typically offered as securities and are subject to regulation by the Securities and Exchange Commission (SEC) and state securities laws. Sponsors must comply with registration and disclosure requirements.
-
What is the sponsor's experience and track record?
What are the details of the property (location, tenants, lease terms)?
What are the projected returns and how are they calculated?
What are all the fees and expenses associated with the investment?
What is the anticipated holding period?
What are the risks involved?
Is there a potential secondary market for the DST interests?
What is the sponsor's exit strategy for the property?
What are the tax implications of investing in this DST?