A Delaware Statutory Trust (DST) is a specialized type of trust established under Delaware state law. It holds title to investment real estate properties and allows investors to purchase fractional shares.
These passive investment vehicles have many unique characteristics that have made them increasingly popular in recent years. Following, you’ll find a quick overview of the DST’s key features, as well as some important benefits of investing in a DST along with potential risks and limitations to consider.
Qualification as a Like-Kind Replacement Property
IRS Revenue Ruling 2004-86 qualifies a DST investment as an eligible “like-kind replacement property” for a 1031 exchange. This is important for several reasons.
First, the 1031 exchange rules require investors to identify one or more replacement properties within 45 days of the sale of the relinquished property and close on at least one of the identified properties within 180 days from the initial property sale. Those who struggle to meet these deadlines may be able to salvage the exchange by choosing a DST as their replacement property.
A DST may also be an attractive option for property owners who want to continue investing in real estate without having to deal with the hassle of actively managing real property.
Unique Sponsor/Investor Ownership Structure
A DST is established by a sponsor who takes responsibility for the following activities:
- Finding potential properties and conducting due diligence
- Arranging financing
- Setting up the DSTs structure
- Filing paperwork with regulatory authorities
- Packaging and marketing the DST offering
- Providing financial statements and tax reporting documents to investors
- Determining optimum time to sell the property
Sponsors sometimes also manage the properties themselves. However, many outsource this task to a third party.
DST investors, also called beneficiaries, provide equity capital to replace the sponsor’s initial investment. In exchange, they receive fractional ownership, which provides a beneficial interest in the trust that holds the property, rather than direct shares of the underlying properties. Investors have no decision-making control and in exchange, their financial liability does not extend beyond the investment they’ve made.
Benefits of DST Ownership
There are several potential benefits of adding a DST to your portfolio. Many stem from the vehicle’s unique structure.
Passive Income
While the DST sponsor has full decision-making control and handles managerial duties such as dealing with tenants and taking care of property maintenance and upkeep, DST investors may receive passive income in the form of consistent monthly or quarterly distributions. This arrangement can be attractive to investors looking for professional management or those who do not want to deal with the hassles of active property ownership.
Fractional Ownership
Each DST beneficiary owns a portion of the DST based on the amount they’ve invested. However, no single owner can claim sole ownership rights, regardless of their investment percentage. By allowing multiple unrelated parties to purchase fractional shares, a DST allows investors to access large, high-value properties without over-extending their financial means.
Diversification
Portfolio diversification is a cornerstone of risk mitigation. Since DSTs can be purchased with a relatively small investment compared to a direct property purchase, investors may be able to achieve diversification by investing in multiple DSTs or choosing a DST with a broad portfolio of assets.
Institutional Grade Properties
DSTs typically invest in high-quality institutional-grade commercial properties. This may include multi-tenant office buildings, self-storage buildings, multifamily residential buildings, industrial properties, and multi-tenant retail properties. Some also invest in niche property types, like medical offices, hotels, or senior housing.
Limitations of DST Ownership
As with most investment options, DSTs do have some potential drawbacks to consider.
Illiquidity
Many DSTs have holding periods of five to 10 years. During this time, you may be unable to access the capital you’ve invested. This makes them suitable only for investors who are comfortable with intermediate-term timelines and have sufficient assets to cover their financial needs during the holding period.
Lack of Operational Control
While there are advantages to handing over the decision-making power to professionals, some investors are uncomfortable with the lack of control offered by a DST investment. Before investing in a DST, remember that you will have no input in the day-to-day management of the properties it holds.
Accredited Investor Requirements
DSTs are only available to accredited investors, which may be a significant drawback if you don’t
- Have had a gross annual income of more than $200,000 ($300,000 for married couples filing jointly) for the past two years and reasonably expect to earn that much or more in the current year, OR
- Have an individual or joint net worth of more than $1 million, excluding your primary residence.
Learn More About Investing in DSTs
Delaware Statutory Trusts are unique investment vehicles that may make them attractive to real estate investors looking for passive income, professional management, and access to institutional-grade properties. Since the IRS acknowledges them as a qualified replacement property, they’re also popular among investors engaging in a 1031 exchange.
To learn more about the types of DSTs available and how they may fit into your investment strategy, contact us today to schedule a consultation with a member of our team.
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