Looking closer into DSTs

Delaware Statutory Trusts (DSTs) have become increasingly popular in recent years as a way to invest in commercial real estate without having to manage the property themselves. DSTs offer a number of potential benefits, including limited liability protection, potential tax advantages, and professional management of the property. However, there are also some drawbacks to investing in DSTs, such as the fees and expenses associated with the investment, the potential lack of control over the property, and the potential risks associated with the underlying real estate. In this article, we will explore both the pros and cons of investing in Delaware Statutory Trusts to help make informed decisions about whether this investment vehicle makes sense for you.

What is a DST? 

A Delaware Statutory Trust (DST) is a separate legal entity that holds title to property, and investors can own fractional interests in the trust. This allows investors to invest in large commercial real estate properties, such as apartment complexes, office buildings, or shopping centers, without having to manage the property themselves. 

DSTs are commonly used as a way for investors to complete a 1031 exchange, which allows them to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds into a like-kind property, such as a DST.

A DST is a legally recognized trust that is created under Delaware law. It is commonly used as a business structure for holding and managing real estate assets, although it can also be used for other types of assets.

In a DST, investors buy “beneficial interests” in the trust, which represent their ownership in the underlying assets. The trust is managed by a trustee, who is responsible for managing the assets and making distributions to the investors.You can read more about Delaware Statutory Trusts (DSTs) here.

The Advantages of DSTs

1. Tax Benefits:
One of the primary benefits of a DST is that it can be structured as a tax-deferred exchange under Section 1031 of the Internal Revenue Code. This means that investors can exchange one property for another without incurring immediate tax liability on the transaction.

2. Passive Income:
A DST can generate passive income for investors, typically in the form of rental income from real estate assets. This can provide a steady stream of income without the need for active involvement in managing the assets.

3. Limited Liability:
Similar to a limited liability company (LLC), a DST can provide limited liability protection to investors. This can help protect their personal assets from liability related to the trust’s assets and operations.

4. Professional Management:
A DST is managed by a trustee, who is responsible for managing the assets and making distributions to investors. This can provide investors with access to professional management and reduce the burden of managing the assets themselves.

5. Access to Larger Assets:
Through fractional ownership, investors can access larger, institutional-quality real estate opportunities that might be financially unfeasible individually.

6. Portfolio Diversification:
By investing in a DST, investors can diversify their portfolios by adding exposure to different types of assets or markets.

7. Estate Planning:
DSTs can streamline the estate planning process, facilitating the transfer of wealth to heirs without the complexities of probate, ensuring a smoother transition and asset distribution.

For investors drawn to real estate but wary of the hands-on management, a Delaware Statutory Trusts (DSTs) offer a viable solution. They alleviate the issues like day-to-day oversight,making them a smart choice for anyone looking to minimize personal involvement while still capitalizing on the financial perks of real estate investments

The Disadvantages of DSTs

1. Limited Control:
Investors in DSTs often forfeit control over the day-to-day management and strategic decisions of the property, which are handled by the trustee. This can be hard for investors who have been hands on for many years to accept. 

2. Illiquidity:
Similar to other real estate investments, DSTs lack liquidity. Expect to hold your ownership through the lifecycle of the deal. Selling shares in a DST can be challenging and time-consuming, potentially complicating exit strategies.

3. Higher Fees:
DSTs are associated with several fees, including management and acquisition fees, which can erode overall returns. Notably, high load fees, or upfront charges, can significantly delay the break-even point, requiring several years to balance out through the investment’s income or appreciation.

4. Limited Disclosure:
Unlike publicly traded companies, DSTs do not have the same rigorous disclosure requirements, which can result in less transparency for investors.You should familiarize yourself with each offering you are interested in and understand the sponsor companies you are working with.

5. Market Risks:
All real estate investments carry market-related risks; DSTs are no exception. Economic downturns, tenant issues, and property devaluation can adversely affect investment returns.

6. Complex Structure:
The legal and managerial structure of a DST can be complex, often necessitating professional guidance for both setup and ongoing management.

Overall, it’s important to conduct thorough due diligence when considering an investment in a DST. Review all relevant documents and information, understand the fees and liquidity terms, and consider your investment objectives and risk tolerance. Additionally, consult with a financial advisor or attorney to ensure the investment is suitable for your specific situation.

What Else do I Need to Know

Legal Structure: A DST is a legal entity that is created under Delaware law. It is governed by a trust agreement, which outlines the rights and responsibilities of the trustee and the beneficial owners.

Accredited Investors: DSTs are typically only available to accredited investors, who are investors that meet certain income or net worth requirements. This means that they may not be suitable for all investors.

Minimum Investments: The minimum investment in a DST can vary depending on the sponsor and the specific offering. Some DSTs may require a minimum investment of $25,000, while others may require a minimum investment of $100,000 or more.

Professional Management: DSTs are typically managed by a professional trustee who is responsible for managing the assets and making distributions to investors. This can provide investors with access to professional management and reduce the burden of managing the assets themselves.

In summary, DSTs offer a unique and beneficial avenue for real estate investment, particularly appealing to mature investors seeking to mitigate the direct responsibilities of property management and enjoy the benefits of commercial real estate ownership. The structure of DSTs provides a blend of passive income, tax deferral under IRC Section 1031, and limited liability, all under the umbrella of professional management. These features make DSTs a potent tool for portfolio diversification and estate planning.

However, as with any investment, DSTs come with their own set of challenges and considerations. The lack of direct control, potential illiquidity, and higher fees must be carefully weighed against the anticipated benefits. Moreover, the complex legal structure and the necessity for accredited investor status can limit accessibility and require careful due diligence before investment.

It’s important to note that the information provided in this article is for educational and informational purposes only. Investing in real estate and DSTs involves risks, and decisions should be made after thorough research and consultation with qualified financial and legal professionals. This article does not constitute financial or investment advice. Always seek guidance from professionals who are well-versed in DSTs and their implications before making any investment decisions.