A Delaware Statutory Trust (commonly referred to as DST) is, as its name implies, a legal entity created as a trust under Delaware state law. A DST is created for real estate investment purposes, and is especially useful in an exchange of 1031.
Under a DST, investors have a share of their own DST. The DST, in turn, holds the title of several real estate interests and distributes the income received from the properties (either through rental income or the sale of the property) to investors in proportion to their participation in the DST.
The DST, through its signatory employer, makes all decisions related to any property that maintains the trust, releasing the investors of this responsibility. One important thing to note from a DST is that trust is not considered a taxable entity, so profits or losses are passed on to trusted investors.
When it comes to changes in 1031, the IRS has determined that any interest in the benefit of the DST is considered to be identical to a direct interest in real estate. This means that the properties of DST meet the requirements for 1031 exchanges, as long as the other requirements of this change are met.
For investors who do not seek responsibility for day-to-day management and the decision-making authority related to real estate, a DST can be an excellent choice.
Benefits of a DST
One of the main reasons why investors are so interested in buying an interest in a DST is the benefit of having securitized real estate. However, a DST also provides other benefits to investors.
Removes a requirement for unanimous approval
Unlike a joint tenancy property (TIC) structure, a DST does not require the unanimous approval of all investors to make decisions related to the maintained real estate. For example, the economic environment required the fast sale of a real estate property held by the DST, the decision making authority to enumerate or sell the property falls on the signing standards of the DST in accounts of the investors themselves.
Limited civil liability
Due to the "bankrupt distance" provision of each DST, individual investors have limited liability with respect to their personal assets. If the DST fails and goes bankrupt, the most at risk for any individual investor is their investment in trust. Trustees are limited to any other assets of any investor.
In order to finance purchases by the DST, lenders deal with DST as a single borrower (instead of scrutinizing each and every individual investor). This makes financing easier and less expensive to obtain. In the same way, because the individual investor is not subject to a credit selection, his individual credit rating will not be affected by the participation in a DST.
They have eliminated the loan requirements burst
Since the rights of a DST investor are limited to receiving only dividends and the investor does not have a voting authority related to the daily operations, they eliminate the fraudulent eliminations of investors for investors individual Any lender will only look at the trustee of the signal or the sponsor for these provisions.
Minimum minimum investment
A DST allows up to 499 individual investors, which allows the minimum investment amounts to be much lower than those of a TIC (which only allows up to 35). This allows investors with less investments to continue participating in a shared ownership strategy for real estate investments.
Risks of a DST
A DST offers investors a wealth of benefits that are not found in other types of ownership of real estate investments. However, the DST does not come without risk, like any other investment.
One of the biggest risks to keep in mind is the dependency of a sponsor of the program to manage the investment. Unlike a TIC, where individual investors have a direct opinion, investors on a DST resign from the day-to-day decision-making authority of the sponsor of the program. This means that the sponsor of the program makes conflicting decisions or becomes insolvent, the DST could fail without any significant contribution from individual investors.
In addition, as with any investment, there are risks related to taxes associated with the use of a DST for 1031 exchange purposes. Although DST are often ideal for this purpose , there is no guarantee regarding the IRS. There is always the possibility that the IRS does not approve the DST structure or a 1031 specific exchange.
Although the benefits of a DST tend to overcome the risks, it is wise to have a full understanding of both when deciding whether to participate in a DST.