Delaware Statutory Trusts
A Delaware Statutory Trust (commonly known as a DST) is, as the name suggests, a legal entity created as a trust under Delaware state law. A DST is created for real estate investment purposes and is especially useful in a 1031 exchange.
Under a DST, each investor owns a prorated share of the DST itself. The DST, in turn, owns ownership of various real estate interests and distributes any income received from the properties (either through rental income or from the sale of the property) to investors in proportion to their interest in the property. from DST.
The DST, through its signatory trustee, makes all decisions related to any property held by the trust, releasing investors from this responsibility. One important thing to note about a DST is that the trust is not considered a taxable entity, so any gains or losses pass through to the trust’s investors.
When it comes to 1031 exchanges, the IRS has determined that any beneficial interest in DST is treated as identical to a direct interest in real property. This means that DST-held properties fully qualify for 1031 exchanges, as long as the other requirements of the 1031 exchange are also met.
For investors who are not looking for the responsibility of day-to-day management and decision-making authority related to real estate, a DST can be an excellent option.
Benefits of a summer schedule
One of the main reasons investors are so interested in acquiring a stake in a DST is the benefit of owning securitized real estate. However, a DST also provides other benefits to investors.
Eliminates the unanimous approval requirement
Unlike a Tenancy-In-Common (TIC) ownership structure, a DST does not require the unanimous approval of all investors to make decisions related to real property held. For example, if the economic environment requires the quick sale of a parcel of real estate held by DST, the decision-making authority to list or sell the property rests with the DST signatory trustee rather than the investors themselves.
Limited Personal Liability
Due to the “remote bankruptcy” provision of each DST, individual investors enjoy limited liability as to their personal assets. If the DST fails and you file for bankruptcy, the biggest risk for any individual investor is their investment in the trust. Trust creditors are limited to reaching any other assets of any investor.
simplified financing
For the purposes of financing DST purchases, lenders treat DST as a single borrower (rather than examining each and every investor). This makes financing easier and less expensive to obtain. Also, because the individual investor is not subject to a credit assessment, their individual credit rating is not affected by participation in a DST.
Loan exclusion requirements removed
Since the rights of a DST investor are limited to receiving distributions only and the investor has no voting authority in connection with day-to-day operations, the investor fraud exclusions are eliminated for individual investors. Any lender will only look to the signatory trustee or sponsor for these exclusion provisions.
Lower minimum investment
A DST of up to 499 individual investors is allowed, allowing for much lower minimum investment amounts than with a TIC (which only allows up to 35). This allows investors with less to invest to still participate in a shared ownership strategy for real estate investments.
Risks of a summer time
A DST offers the investor many benefits not found in other types of shared ownership real estate investments. However, DSTs are not without risk, like any other investment.
One of the biggest risks to consider is reliance on a program sponsor to manage the investment. Unlike Tenancy-In-Common (TIC), where individual investors have a direct say, investors in a DST relinquish day-to-day decision-making authority to the program sponsor. This means that if the program sponsor makes rash decisions or becomes insolvent, the DST could fail without any significant input from individual investors.
Also, as with any investment, there are tax-related risks associated with using a DST for purposes of a 1031 exchange. While DSTs are often ideal for this purpose, there are no guarantees when it comes to the IRS. There is always the possibility that the IRS will not approve the DST structure or a particular 1031 exchange.
While the benefits of a DST tend to outweigh the risks, it is prudent to have a full understanding of both when deciding whether to participate in a DST.