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Delaware Statutory Trust (DST)

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.

General Guidelines:

  • 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)

Why Consider a DST?

  • Potential to own institutional quality real estate
  • Ability to diversify by property type and location
  • Turnkey solution: Sponsor is responsible for sourcing, due diligence, structuring and financing of debt, property and program management
  • Fast and efficient closing process to meet timing requirements
  • Certainty of closing on acquisition of replacement property
  • Elimination of property management responsibilities
  • Potential for monthly income
  • Long-term, non-recourse financing in place

Why Invest Cash into DST’s?

The potential benefits of a DST program are not restricted to 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

Limitations on a DST:

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)

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