Let's understand the basics and address common misconceptions.
What is Delaware Statutory Trust (DST)?
A Delaware Statutory Trust, or DST for short, is a trust that typically holds real estate and is offered as replacement property for a 1031 exchange transaction.
The structure allows for fractional ownership. Investors can diversify real estate holdings with multiple DSTs or one DST with multiple assets within it. Most programs have a minimum of $100,000.
The investor in a DST is a beneficial owner of the trust, not a limited partner. Each owner receives their share of cash flow, tax benefits and appreciation. Basically, the DST investor has the same benefits and risks as a large-scale investment property owner.
What Does a DST Invest in?
DSTs hold all sorts of real estate assets such as multifamily, industrial, self-storage, senior housing, office buildings, retail properties, student housing, medical office and others. These assets are typically large and of institutional quality. DSTs are professionally managed by the program sponsor or an appointed property manager.
How are DSTs Different than Investing Directly as the Property Owner?
There are two distinct differences:
Management and all decisions on the disposition of the property are the responsibility of the sponsor.
All loans are non-recourse to the investor.
DSTs are financial securities and require the presence of a financial professional such as a Registered Investment Adviser or Financial Adviser to execute the transaction.
Who are DSTs for?
Investors must be accredited to invest in a DST. An accredited investor is:
Anyone with earned income of $200,000 ($300,000 together was a spouse) in each of the prior two years and reasonably expects the same for the current year or
has a net worth over $1 million, excluding the value of the person's primary residence.
DSTs can be a good fit for investors looking to protect wealth, defer large tax bills associated with real estate, and receive a step-up in cost basis for family members once the investor has passed away.
DSTs can be defined as a passive asset. It provides mailbox money. DST is a great fit for investors that seek to prioritize lifestyle over economics.
What are the negatives about DST?
Two items are often identified as negatives with DSTs. They can be expensive and, as an investor, you have no decision making control.
Both of these concerns are valid. DST upfront cost can sometimes reach 15% and, as previously mentioned, you do lose control of the investment management and disposition decision associated with the property.
On cost, the majority of upfront expenses, about 6% typically, can be credited back to investors if they work with a Registered Investment Adviser instead of a Financial Advisor.
We can't help you on the control issue. If this is too big of an obstacle, investors should look elsewhere.
Two other negatives to consider:
DSTs lack liquidity. You are in the investment for 3-10 years depending on the business plan of the sponsor.
The inability to refinance debt used inside of the DST. This forces the sponsor to sell by the end of the financing period. The exit strategy on financed properties is critical.
What are the advantages of DST and what steps should investors take before investing?
Some of the advantages of DST are the following:
Passive Income (mailbox money)
No management of the property.
Ability to diversify your investment with multiple institutional quality assets and different geographic locations.
Ability to defer tax in a 1031 exchange.
Non-recourse debt
DST Could be a Good Option for me. What Should I do Now?
Before investing, potential DST investors should consider the following:
Assemble a team: CPA, attorney, qualified intermediary and investment adviser to assist in DST purchase and 1031 exchange transaction.
Work with your investment adviser to understand your investment requirements.
Consider more than just cash-on-cash returns. Returns are important, but so is risk. Evaluate the deal like any other real estate transaction.
Speak with DST sponsors. Ask questions about investment strategy, experience and exit plan.
Read the private placement memorandum (PPM). This is a painful activity. Your investment adviser should help you with what to focus on in each PPM.
