What is a Delaware Statutory Trust (DST?)

A Delaware Statutory Trust (DST) is a distinct legal entity created under Delaware law that permits fractional ownership of real estate assets that may be used in a 1031 Exchange. However, to use a DST in a 1031 Exchange syndication program, it must comply with the requirements of IRS Revenue Ruling 2004-86, so that a beneficial interest in the trust is treated as an undivided fractional interest in real estate for federal income tax purposes (as opposed to a security or other prohibited interest that would not be treated as real property under Section 1031). An Exchanger can defer taxes by investing in a DST rather than in a whole property.

Frequently Asked Questions

  • Access to more investors than allowed by other legal structures (Maximum 1,999 investors)

  • Lower minimum investment amount Simple and efficient investment process Lender only needs to make one loan because the DST is the sole borrower and owns 100% of the real estate (for non-tax purposes)

  • Loan carve-outs apply to sponsors, not investors Lender does not underwrite each investor Sponsor makes decisions on behalf of the investors

  • Investors cannot cause a default on the entire loan Investors do not need separate special purpose entities (SPEs)
  • Potential to own institutional quality real estate

  • Ability to diversify by property type andl ocation

  • Turnkey Solution: Sponsor is responsbile for sourcing, due diligence, structuring and financing of debt property and program management

  • Elimination of property management responsibilities

  • Potential for monthly income

  • Long-term, non-recourse financing in place

The potential benefits of a DST program are not restricted to a 1031 Exchange funds. Investors may also choose to invest directly into a DST, which may provide the following potential benefits:

  • Tax-deferral strategy

  • Rental income paid monthly

  • Ownership in institutional-quality real estate

  • No management responsibilities/passive ownership

  • Build your own diversified real estate portfolio

  • Depreciation of real estate can help to offset taxable income

The DST must adhere to the following prohibitions, which are commonly referred to as the Seven Deadly Sins (See IRS Revenue Ruling 2004-86):

 

    • Once the offering is closed, there can be no further capital contributions to the DST by either existing or new investors

 

    • The DST cannot renegotiate existing loans or borrow more funds (except in the case of a tenant’s bankruptcy or insolvency)

 

    • The DST cannot reinvest proceeds from the sale of its real estate

 

    • The DST is limited to making minor, nonstructural capital improvements, in addition to those required by law

 

    • Any reserves or cash held between distribution dates can only be invested in short-term debt obligations

 

    • All cash, other than necessary reserves, must be paid out to investors

 

  • The DST cannot renegotiate existing leases or enter into new leases (except in the case of a tenant’s bankruptcy or insolvency)

Potential Benefits

A DST can be a powerful tool to realize investment diversification, which may be achieved by: diversification in geographic region (multiple properties in multiple states); asset class (office, industrial, retail, multifamily); tenant industry and creditworthiness; capitalization structure (debt vs. equity); and/or ownership structure (fee simple vs. leasehold and severalty vs. co-ownership).

One of the positive attributes of a DST for many investors is the ability to relinquish their ongoing property management responsibilities while still maintaining the potential for stable, monthly income from investment real estate.

Fractionalized real estate investments, structured as a Delaware Statutory Trust (DST), may offer investors the opportunity to own a partial interest in an asset than they could not obtain individually. For example, investors may execute a 1031 Exchange from raw land or residential rentals into large, Class A properties with credit tenants, professional management, and better long-term appreciation potential.

With ongoing challenges in the global credit markets, individuals often find it difficult to obtain favorable financing on their own. DST investments remove this stress by securing debt in the name of the trust. Investors then receive their allocated portion of any such financing.