What is a Delaware Statutory Trust (DST)?
An alternative to individual ownership of real estate is a fractional ownership in institutional-quality real estate, the Delaware Statutory Trust (DST) has emerged as a popular vehicle for fractional ownership that qualifies as replacement property in a 1031 Exchange (per IRS Rev Ruling 2004-86). Despite the name, neither the property nor the investors need to be located in Delaware—making it a widely accessible option for Sacramento and California real estate investors.
DSTs are formed by a third party, called the sponsor, who acquires a property (or properties) and puts them into the trust. DSTs can include several asset types, including multifamily, office, industrial, and/or retail. Sponsors then open the trust so investors can purchase a beneficial interest. Most DSTs require a minimum investment of at least $100,000 and the investor must qualify as an accredited investor.
Some DST sponsors manage properties on behalf of the DST while other sponsors hire professional management and oversee the management company. Because the sponsor manages and operates the property—including overseeing the leasing of units as well as paying all property expenses and making the majority of repairs and renovations—investors enjoy the benefits of their investment with no management headaches, no out-of-pocket expenses, and no capital calls.
As a beneficiary of the trust, investors have no say in the day-to-day management of the property or the eventual sale of the property. The sponsor will outline the strategy and timeline for disposition of the property in the private placement memorandum (PPM). Typically, the holding period for DSTs ranges from five to seven years. During this time, investors can potentially earn monthly cash flow distributions. Upon sale of the property, the investors will receive their proportional share of the sales proceeds including any gains from potential appreciation.
When properly structured, the Delaware Statutory Trust is classified as a grantor trust for federal income purposes, where the investors are the beneficiaries, and the sponsor is the grantor. Investors in the DST own a direct interest in the real property in proportion to their investment percentage, allowing their investment to qualify as replacement property under the like-kind exchange rules of a 1031 Exchange.
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There are material risks associated with investing in private placements, Delaware Statutory Trusts (“DSTs”) and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Legacy Investments & Real Estate is independent of CIS and CAM.