Delaware Statutory Trusts
- Delaware Statutory Trusts
A Delaware Statutory Trust, or DST, is a separate legal entity created as a trust under Delaware statutory law. In a DST the title of the property is held in the name of the trust and each individual investor acquires a beneficial interest in the trust and receives their pro rata share of the income, tax benefits, and appreciation. A beneficial interest in a DST is deemed to be a direct interest in real estate for tax purposes under IRS Revenue Ruling 2004-86. DST properties are generally limited to newer properties with credit tenants and long term triple net leases, master leases (where the sponsor or sponsor affiliate operates the property on a triple net basis), or ground leases.
- Benefits of Delaware Statutory Trusts
- Risks of Delaware Statutory Trusts
Simplicity & Ease of Ownership DST ownership provides simplicity and ease of ownership by eliminating active property management headaches for investors. Real estate investors who are tired of the day to day burdens of property management or who own land and would like to own income producing property may benefit from a professionally managed or triple net leased DST property. The Sponsors of DST properties source potential acquisitions, conduct extensive due diligence, arrange financing, manage the asset, negotiate leases, distribute income, and provide quarterly and annual reports for investors. Property tours and conference calls are typically offered to investors as well.Monthly Cash Flow One of the primary benefits of owning DST properties is the potential to generate income. Cash flow from a DST is paid monthly and may be partially sheltered from taxes. As with any real estate, there is no guarantee of steady income, but investing in a diversified portfolio of quality DST assets may reduce the reliance on one or a few tenants.
Higher Quality Real Estate DST ownership offers investors the opportunity to invest in a caliber of property that they may not be able to acquire on their own by allowing up to 99 investors in a property.
Low Minimums and Flexible Investment Amounts Minimum investment amounts in DSTs are as low as $100,000. These low minimums enable investors to participate in the ownership of larger, higher quality assets in preferred locations with credit tenants and also facilitate diversification into a portfolio which may include different property types, locations, tenants, and industries. Flexible investment amounts enable investors to precisely match the equity and debt requirments of their 1031 exchange.
Diversification DST ownership enables investors to diversify their 1031 exchange proceeds, thereby potentially reducing the risks associated with investing in a single asset. It may be possible for an investor to own DST and TIC interests in multiple asset classes and locations such as: a 400 unit apartment complex, a medical office building, a triple net leased retail property leased to a credit tenant. It is important to note, however, diversification does not guarantee against loss, and income is not guaranteed and may fluctuate.
Pre-arranged Financing Arranging for financing within the time constraints of a 1031 exchange can be difficult. Most DST properties are offered with pre-arranged, non-recourse loans making it easier to replace required debt in a 1031 exchange. For those investors seeking properties without leverage there are typically several options available.
Real Estate Taxation Like any real estate investment, DST ownership offers the benefit of depreciation in addition to the capital gains deferral received from a 1031 exchange.
Ready Inventory of Properties Available A ready inventory of DST (and TIC) properties allows individuals to easily identify properties within the 45 day identification period of a 1031 exchange. DSTs may also be useful as a “backup” property in case a preferred property fails to close.
Extensive Due Diligence The quality of the property and its management determine in large part how reliable the investment will be in terms of preserving principal, cash flow, and long-term appreciation. Due diligence is performed on each property, surrounding market, and real estate provider (Sponsor) before a property is recommended to our clients. 1031 Investment services utilizes our own in-house due diligence in addition to that of our broker-dealer and highly regarded third party organizations to help ensure the integrity of each client’s investment.
Reduced Closing Costs and Timely Closing Process DSTs are typically offered without additional closing costs to investors and closings can often be arranged within a week of the sponsor’s receipt of an investors Purchase Agreement.
General Real Estate Risk As with any real estate investment DST properties may lose value. Various economic cycles can affect the performance and value of any property. Real estate investing is speculative and involves a high degree of risk; as such, investors should be able to bear the loss of their investment.
No Guarantee of Income or Performance Neither 1031 Investment Services nor any of the Sponsors of DST or TIC properties guarantee income distributions or overall performance of any property.
Non-Liquid A DST investment is an investment in real estate and considered illiquid. Although investors have the right to sell their interest at any time, there is no established secondary market. Investors should be prepared to hold their interests until disposition of the property.
Fees and Expenses The cost of acquiring a DST may be more than purchasing a property entirely on your own. In some instances, costs associated with the transaction may impact returns and outweigh the tax benefits of the investment.
Leverage Enhances Volatility While DST and TIC properties are offered with varying degrees of financing, there are additional risks associated with leveraged properties including increased volatility and risk of principal invested.
Control Investors in DSTs have limited rights and no control in the operation of the property.
Conflicts of Interest Conflicts of interest may exist that could adversely affect the investment.
1031 Exchange Risks There are a number of significant tax risks and issues related to the purchase of a beneficial interest in a DST property. Investors should consult their tax advisors and legal counsel before investing. If an investor does not comply with the detailed requirements of Section 1031 they may lose the tax benefits of a 1031 exchange.
