Skip to main content

Delaware Statutory Trusts

What Is a Delaware Statutory Trust [DST]?

  • A Delaware Statutory Trust is a securitized real estate investment vehicle which allows multiple investors to each hold an undivided fractional interest in the holdings of a trust that owns one or more specific investment properties that are significantly larger and of higher quality than they could normally acquire on their own.
  • The trust is established by a professional real estate company, referred to as “DST sponsor”, who first identifies and acquires the real estate assets before offering them to investors.
  • DSTs were established under the Delaware Statutory Trust Act (DSTA) and are explicitly recognized by the IRS as 1031-compatible pursuant to Revenue Ruling 2004-86.
No Closing Risk

The DST is a turnkey solution with the trust already owning the property with financing in place. You can generally close within 3-5 business days.

No Management Responsibility

The DSTs are professionally managed and the investor has no management responsibility. Eventually, even hands-on investors age out of active management as they choose to focus their time and energy more meaningfully elsewhere.

Tax Advantaged Monthly Cash Flow

All DST’s are structured to pay monthly distributions and all the tax shelter benefits of real estate ownership are passed to the investor.

Diversification of Investment

DSTs allow exchangers to specify the amount of their fractional ownership investment, allowing for the flexibility to build diversified portfolios of multiple DSTs. Some DSTs today even own multiple properties resulting in a ‘mini REIT-like’’ intrinsic diversity.

Installment Sale Optionality

Some DSTs are part of an UPREIT plan where the sponsor who created the DST offers to buy up the exchanger’s interest in the DST in exchange for operating units of an affiliated REIT in another tax deferred exchange under Section 721 of the Internal Revenue Code. From that point on, the exchanger can liquidate any portion of his REIT shares on their own time schedule. For more on UPREITs, click here.

Institutional Quality Real Estate

DST’s generally hold institutional quality properties that were once the exclusive province of large pension funds, insurance companies, hedge funds and REITS. They cover the real estate spectrum from multifamily residential developments, to retail, hospitality, industrial, office, storage, and more.

Ease of Debt Replacement

If an exchanger needs to replace debt, most DST’s have in-place debt making it easy to avoid taxable mortgage boot. Further, the debt is nonrecourse, meaning that the lender cannot look to the exchanger for repayment of that debt.

Monthly Distributions

DST’s pay regular monthly distributions.

Stabilized Properties

DSTs are generally stabilized investments meaning that there is no developmental or lease-up risk. Most of the risks of professional managed stabilized properties is macro economically related and less related to intrinsic aspects of the property.

Next Level Oversight

Because DST’s are securitized investments, they are subjected to next-level degrees of due diligence. They are subjected to much more scrutiny than an ordinary real estate deal.

Primary Plan or Backup Plan

In addition to being used as the primary replacement property vehicle, DSTs can also be used as a backup strategy for exchangers seeking to acquire private real estate. They can also be used to avoid residual taxable ‘boot’ issues because of their investment flexibility. So even if you have a private replacement property in mind, you can still benefit from DST’s as an integral part of your tax deferral strategy.

Estate Planning Benefits

DSTs can offer numerous estate planning benefits from ease of splitting fractional interests among heirs to certain asset protection benefits.

Relinquishment of Control

Beneficiaries of DSTs relinquish control over management decisions. The ‘’sponsor’’ or its affiliate is responsible for day-to-day decisions as well as when to liquidate the investment.

Fees May Be Higher

Fees may be higher than direct purchase by the whole. Its ‘more
expensive to create a securitized offering that allows for fractional interest investments. Also, professional management adds another layer of cost over active management.

Lack of Liquidity

DSTs are illiquid investments, and most DSTs are targeting a 7-10 year holding period. There are some offerings targeting A shorter holding period of 3-5 years, but they are less common. While it is possible to sell your interest earlier, there is no formal secondary market, so it is likely to take time and sell for a discount to fair value.

Accredited Investors Only

DSTs are sold pursuant to an exemption to the registration rules under the SEC. Accordingly, that exemption requires that all investors be accredited investors demonstrating at least $1 million net worth or $200,000 in annual income.

Strict Rules that Apply To DSTs

As consideration for granting safe-harbor status to DSTs, the IRS imposed compulsory guidelines that DST’s must follow. These guidelines have become fondly referred to as the ‘’Seven Deadly Sins of DST Management.” This is a bit of a misnomer, because these limitations on the trustee’s powers are really designed to protect the integrity of the investment:

No Capital Calls

Once a DST offering has closed, the trustee may not request additional capital contributions or capital calls from investors, to insure that there is no dilution to an investor’s ownership share.

Loan Terms Protection

The trustee cannot borrow more funds or negotiate the terms of an existing loan. The existing loan terms are material to the consideration of an investment in a DST, and restricting this power protects the original terms of the deal.

Proceeds from Sale Must Be Distributed to Investors

A DST cannot reinvest proceeds from the sale of its real estate. Again, the purpose here is to preserve the business plan that once the property is liquidated, the proceeds will be distributed to the investors who can then decide whether to redeploy those proceeds into another 1031exchange or cash out and pay their taxes.

Only Minor Capital Improvements

The DST sponsor has limited authority to make capital improvements, except for those associated with (a) normal repair and maintenance; (b) minor, non-structural capital improvements, and (c) those required by law. This provision is designed to protect the investor from ill-fated capital upgrades not contemplated by the offering plan.

Cash Reserve Investment Rule

Any cash reserves being held between distribution dates may only be reinvested in the DST’s short-term debt obligations. The obvious purpose of this rule is to keep distributable cash in safe cash equivalents which can be easily liquidated before the next distribution date.

All Cash to Be Distributed to Investors

All cash, other than necessary reserves, must be distributed to co-investors on a regular basis. This is another protective provision to prevent sponsor misappropriation of funds & to ensure that distributions are made on schedule.

No Lease Modifications

The DST sponsor cannot renegotiate existing leases or enter new leases after the offering has closed. The purpose of this rule is to protect the lease terms on which the cash flow projections are based. For administrative convenience, the DST will often build in a ‘master lease’ structure whereby the DST leases the property to a ‘master tenant’ who in turn enters into leases with sub-lessees. This insures that the master-tenant will exercise prudence in negotiating with sub-tenants because the master tenant is primarily responsible to fulfill the master lease obligations.

Recent DST Offerings

Examples of recently closed offerings meant to reflect the broad depth and breadth of the DST marketplace.

MULTI-FAMILY

Class A 168-unit multifamily community located in the heart of Downtown San Diego’s exclusive Marina District.

Location:
San Diego, CA
Syndicated Purchase Price:
$83,590,628

Government Office

Unique mission critical property leased to the U.S. Government for use by the Social Security Administration department.

Location:
Birmingham, AL
Syndicated Purchase Price:
$296,238,114

Independent Living

Active Adult (55+) multifamily community consisting of 231 apartment Units.

Location:
King of Prussia, PA
Syndicated Purchase Price:
$127,181,000

Portfolio of Essential Retailors

Diversified portfolio of 15 properties with net leases backed by six historically recession-resilient tenants.

Location:
Various (6 States)
Syndicated Purchase Price:
$89,215,000

Student Housing

81 unit (251 bed) Class A, mid-rise student housing property just steps away from campus at the University of Alabama.

Location:
Tuscaloosa, AL
Syndicated Purchase Price:
$864,748,240

Portfolio of Three National Logistics Centers

Three newly constructed built to suit properties 100% leased to Amazon.com

Location:
Detroit, MI, Louisville, KY, Richmond VA
Syndicated Purchase Price:
$812,108,972