What is a DST?

Delaware Statutory Trusts (DST) Overview

A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under the laws of Delaware in which each owner has a “beneficial interest” in the DST for Federal income tax purposes and each owner is treated as owning an undivided fractional interest in the property. In 2004, the IRS released Revenue Ruling 2004-86 which allows the use of a DST to acquire real estate where the beneficial interests in the trust will be treated as direct interests in replacement property for purposes of IRC §1031.*

Because DST opportunities are often “packaged” by a sponsor with management and financing in place, DSTs offer efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.

DST properties provide an opportunity for diversification, and low equity requirements that may allow smaller individual investors to invest in large institutional investment properties. DSTs involve additional costs over the costs of direct ownership. Income generated from a DST property can often be sheltered from tax through using depreciation and interest deductions.

With the Unique Structure, a DST Can Offer Many Benefits

• Passive ownership
• Professional asset and property ,management
• Access to institutional-quality real estate
• Portfolio diversification
• Lower minimum investments
• Ability to close quickly
• Estate planning

Potential Advantages of 1031 DSTs^*

Generally, 1031 exchanges and DSTs are attractive in that they:

• Allow lower required investment minimums than a traditional TIC investment. DSTs allow for a larger number of investors (up to 499), which reduces the minimum required investment.
• Are easier to finance than a traditional TIC investment. In a DST the lender does not need to underwrite or qualify any of the individual investors, as they are isolated from the operation of the property. The sponsor will generally be the signatory trustee of the DST. A traditional TIC investment requires that the investor sign loan documents.
• Have lower ongoing fees than a traditional TIC investment. In a TIC, annual Single Purpose Entity (SPE) maintenance fees are required. They are eliminated in a DST because an SPE is not required.

Risks of 1031 DSTs^*

Beneficial Owners possess limited control and rights. The trust will be operated and managed solely by the Trustee. Beneficial Owners have no right to participate in the management of the trust.

Beneficial Owners do not have legal title. Beneficial Owners do not have right to sell the property.

Risks related to an investment in real estate. Real property investments are subject to varying degrees of risks including but not limited to: the speculative market and financial risks associated with fluctuations in the real estate market; loss of principal; variations in occupancy which may negatively impact cash flow; limited liquidity; limits on management control of the property; and changes in the value of the underlying investments.

Guidelines for DSTs

There are certain guidelines that DSTs must follow:

1. Once the offering is closed, there can be no future contribution to the DST by either current or new Beneficial Owners.
2. The Trustee cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any party.
3. The Trustee cannot reinvest the proceeds from the sale of its real estate.
4. The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by law.
5. Any cash held between distribution dates can only be invested in short-term debt obligations.
6. All cash, other than necessary reserves, must be distributed on a current basis.
7. The Trustee cannot enter into new leases or renegotiate the current leases.

Further Information

This is neither an offer to sell nor a solicitation of an offer to buy any security. Such an offer may only be made by means of a private placement memorandum. Before we provide information regarding future DST offerings, properties and other details, we are required to obtain and discuss information about potential clients and their investment objectives.

*Obviously it is not realistic to identify all of the potential advantages or risks that an individual investor may encounter in a particular 1031 DST. Investors should carefully review any and all applicable prospectuses and or private placement memorandums prior to making any investment. Investing in alternative products carries a high degree of risk. Not all investors will be qualified to invest in 1031s and DSTs.  

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. DST 1031 Investments does not offer tax or legal advice.