Feb 07, 2023

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What is a DST, and Why Investment Property Owners Should Learn About the Strategy

Many investment property owners are unfamiliar with the acronym DST, which stands for Delaware Statutory Trust. Even investors seeking to sell property and reinvest in replacement properties using a 1031 exchange to defer capital gains and depreciation recapture often have only a vague understanding of DSTs. 

But, if one owns investment property and intends to sell at some point with a 1031 exchange, it is beneficial to learn more about the DST for a variety of reasons.

What is a DST?

A Delaware Statutory Trust (DST) is a type of legal entity that is formed under the Delaware Statutory Trust Act. It is formed and organized in the state of Delaware and is owned by one or more individuals or institutional investors. The trust is administered by a trustee, who holds title to the trust’s assets on behalf of the beneficiaries.

The Delaware Statutory Trust may be an attractive vehicle for investors because it is able to provide the same pass-through tax benefits as a limited partnership while providing the same level of liability protection of a corporation. The trust also offers ownership of assets that are not traditionally available through traditional investment vehicles, such as institutional real estate, and requires a relatively lower investment amount for investors.

How Does a DST Work? 

A DST is created by a sponsor that establishes the trust, identifies potential properties to be held in the trust, and, following the essential due diligence and analysis process, provides the funds and financing to acquire the properties. 

Once the properties have been purchased, the sponsor makes them available to accredited investors in an offering. While the trust retains ownership of the assets, investors purchase beneficial fractional interests, which represent a percentage of the underlying asset values.

What Makes DSTs Attractive?

One characteristic investment property owners looking to sell property and reinvest in other property is that they can exchange the hassles and headaches of hands-on-real estate management for a passive interest in a professionally managed institutional quality property. 

For example, an investor could sell a multi-family rental property and instead of replacing it with the same type of asset, could own an interest in a diversified portfolio of properties that includes a student housing building, self-storage facility, a medical support complex, and a retail pharmacy. Since the purchase price of the trust’s properties may range from $25 to $150 million, a DST offers investors the ability to own assets that otherwise might be unattainable. 

Another benefit of DSTs is they already have secured properties, so during the offering phase, investors are able to select one or more DSTs during the 45-day replacement property identification period of their 1031 exchange and readily close on the DST properties within the 180-day closing time frame. This single attribute has saved countless investors from failed exchanges where they were unable to meet these tight deadlines.

Overall, the Delaware Statutory Trust can provide flexibility and liability protection to investors. It is a vehicle for those seeking to acquire assets while avoiding the complexities and costs of forming a limited partnership. The trust allows investors to benefit from pass-through taxation and the independence to manage their investments without the burden of individual ownership.

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Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.

Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

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.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities (typically a private business development company or an organization with assets exceeding $5 million; or in some situations if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor provided the organization was not formed with a sole purpose of purchasing specific securities) only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. DST 1031 Connect is independent of CIS.

 

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