What is a DST (Delaware Statutory Trust)?

Written By
Carl E. Sera, CMT
Published On
January 25, 2021

What is a Delaware Statutory Trust (DST)?

DSTs can be a bit confusing.  But if you are reading this, it’s likely that you are exploring DSTs as a way to defer paying the 4 taxes on the sale of highly appreciated or low-cost basis real estate.

Many investors are familiar with 1031 exchanges and many that ultimately invest in DSTs have successfully completed a number of real property to real property exchanges.  So, what’s a DST?  The better question is not what it is, but what can it do for you?  First and foremost, A DST is a security.  It is a security that owns real estate and only real estate.  It is special because it is the only type of security we know of that can be substituted for real property when utilizing a 1031 exchange.

What else? Every DST has a unique CUSIP number and can appear right on your brokerage or bank statement.  The flexibility that DSTs afford are only limited by your imagination and situation and is why you will want to work with not only experienced DST consultants but those that understand retirement and estate planning when selecting the right one or two or portfolio of DSTs for your situation.

How do other people describe DSTs?  They say things like the following, A DST is an ownership model through a separate legal entity that allows for a number of accredited investors to pool their resources together to purchase beneficial interest into either a single asset or across a portfolio of properties.  That’s all well and good but a DST is simply a tool that increases your alternatives and my make your life easier.

How does a Delaware Statutory Trust Work?

A typical DST process requires the sponsor (usually a national real estate company) to acquire a property or properties that qualifies as a DST. These properties are institutional-grade real estate like office buildings, industrial complexes, triple net leases, self-storage, manufactured housing and multi-family apartments that are usually out of reach for an average investor.

After the acquisition of the property/properties by the sponsor, property equities or securities are offered to investors for purchase and usually sold through a secondary escrow closing until all the shares in the DST are claimed. Investors that purchased shares or equity in the DST are paid distributions monthly based on their beneficial ownership interest which is a fancy way of saying how much of the DST they own.

Let’s say you purchased 1.85% equity in the DST, you’d receive 1.85% or a proportionate share of the monthly distribution as well as during the eventual sale of the DST. Depending on the DST agreement or type of financing associated with it, the lifespan of a DST varies but is typically sold after being held for 5-10 years.

More importantly, upon the sale of the DST, investors have the option of either cashing out their realized share of the net sale proceeds or doing another 1031 exchange into another DST or cashing out a portion and rolling over the balance.  We like to call DSTs, “real estate rollovers” for that reason.  Why?  Because we still remember when IRAs were first introduced and the typical IRA was invested in a 5-year Certificate of Deposit or CD at the local bank and rolled over every 5 years.

Regulations of the Delaware Statutory Trust

While DSTs are less prone to risk than other real estate investment structures, the IRS has outlined several restrictions to protect the purpose of the DST. These restrictions are known as the Seven (7) Deadly Sins.

  1. Once the offering is closed, there can be no future capital contributions to the DST by either current or new beneficiaries.
  2. The trustee cannot renegotiate the terms of existing loans and cannot borrow new funds from any party unless a loan default exists as a result of a tenant bankruptcy or insolvency.
  3. The trustee cannot enter into new leases or renegotiate current leases unless there is a need due to a tenant bankruptcy or insolvency.
  4. The trustee cannot reinvest the proceeds from the sale of its real estate.
  5. The trustee is limited to making the following types of capital expenditures concerning the property:

(a) expenditures for normal repair and maintenance of the property,

(b) expenditures for minor non-structural capital improvements of the property, and

(c) expenditures for repairs or improvements required by law.

  1. Any cash held between distribution dates can only be invested in short-term debt obligations.
  2. All cash, other than necessary reserves, must be distributed on a current basis

Benefits of Investing in a Delaware Statutory Trust

  1. Passive Investment

Doing a DST relieves you of all forms of landlord responsibilities. The sponsor is responsible for getting the financing, acquisition, and managing of the property. You do not have to deal with the typical landlord duties associated with a conventional rental property.

  1. Access to Institutional-Grade Assets

Investing or doing a 1031 exchange into a DST allows you to be a beneficiary owner of an institutional-grade real estate that would ordinarily be out of your financial reach. Most of the time, DSTs are institutional-grade properties worth tens of millions like triple-net lease and multi-family apartments.

  1. Eligible for 1031 Exchange

Since each investor owns fractional ownership in the DST which in turn owns the property. According to the IRS, securities owned by investors in a trust are considered as direct ownership of a property which makes it eligible for 1031 exchange. So, you can use your beneficial ownership interest in a DST as a replacement property in a 1031 exchange.

  1. Limited Personal Liability

Unlike other forms of real estate investment structure, under the Delaware Statutory Trust, you are not responsible for any recourse debt either now or in the future. This means that in the worst-case scenario, only your original investment is at risk but your other assets outside the DST are safe.

Only the Sponsor who made the loan agreement with the Lender is responsible for the recourse debt.  More importantly, you are not required by the IRS to include DST incurred debts on your financial statement.

Disadvantages of Investing in a Delaware Statutory Trust

  1. Available to Accredited Investors Only

According to the IRS, only accredited investors are qualified to invest in a DST. What this means is that you must have an annual income exceeding $200,000 ($300,000 for couples) for the last two years with the expectation of earning the same or a higher income in the current year or you can qualify by having assets in excess of $1,000,000.  Accredited Investor Definition. Amendments to Accredited Investor Definition.

  1. DST Properties Are Illiquid

This is one of the biggest downsides to investing in a DST. When considering whether to invest in a DST or not, you should be aware that your equity will remain invested until the properties are sold. Equities invested in a DST are difficult to convert to cash which makes it bad for investors looking for a great investment with easy liquidity.

  1. Long-term Investment

If you are an investor looking for a great investment with quick profits, then the DST is not for you because of its lengthy holding period and illiquid nature. Typically, DSTs are held for 5-10 years which makes it a bad choice for short-term investors.

Learn more about Delaware Statutory Trusts and 1031 Exchanges and Delaware Statutory Trust Fees and Commissions.

If you want to see current DST offerings and DST properties and you're an accredited investor, Schedule Your Call Today.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 16 years of experience in the financial services industry with a focus on investment management.

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