What are Delaware statutory trust investments and how do they work? If you are into commercial real estate, this information can be really beneficial for you. Besides, they are commonly used in 1031 exchanges. Also, these trusts help investors manage risk and taxes as well as maximize their profits. However, to use them to their full potential, you should know how to use them. Here is all you need to know about Delaware statutory trust investments, their benefits, disadvantages, and their working process. So, read along!
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Everything About Delaware Statutory Trust Investments
Are you a seasoned commercial real estate investor? Or just starting up? You should know that this mode of investment can benefit you big time. Below, I’ve compiled all the basics and complexities of DSTs for you:
What is a Delaware Statutory Trust?
A DST or a Delaware Statutory Trust allows multiple investors to pool their resources and invest in real estate. Also, this is a shared ownership structure that lets each investor own only a fraction of interest in the entire interest. This is the total opposite of the individual property investment where you have to take ownership of the whole interest.
“Delaware Statutory trusts are legally recognized trusts that let investors collectively own, manage, and operate properties. Keep in mind that the properties can be real, tangible, or intangible.” – Wikipedia
Moreover, the trust is set up by a professional real estate company or a DST sponsor. They begin the process by identifying and acquiring real estate assets. Afterward, they let individuals put their money in and displace it with their own capital. Sounds complex, right? You can always take expert advice from a real estate professional regarding all your investment-related matters.
“DST investments are actually offered in the form of replacement properties using 1031 exchanges.” – Wikipedia
The best thing about Delaware Statutory Trusts is that they allow small investors to try their luck in big investments. But why it is done so? And how it benefits. Well, you are about to find that out… Just keep reading!
How Does a DST Work?
As aforementioned, knowing about Delaware Statutory Trust Investments can really benefit investors. Let me walk you through step-by-step on how it actually works:
This step is actually quite simple. You should know that the DST sponsor is responsible for forming the trust and handling the DST properties. Moreover, you should know that the trust is established under the Delaware law. Besides, the sponsor begins by finding and then acquiring the properties for a portfolio. And then, they allow investors to pool in. Most of the time, they accommodate investors individually.
You should know that the sponsor is responsible for taking care of all the tasks relevant to Delaware Statutory Investments. This includes managing the trust, getting accredited investors on board, catering to outstanding equity requirements, etc. Most importantly, they are responsible for regularly monitoring the performance of these assets.
According to the IRS Ruling 2004-86, Delaware Statutory Trust Investments are bound to be qualified as a 1031 exchange property. This means, the sponsor can only pick replacement properties for the DST. Otherwise, the property will not be qualified for the fund. Moreover, this is beneficial for the investors too. After all, it allows them to enjoy more tax savings on capital gains.
Just like other investment modes, you have to pay some underwriting and administrative costs with Delaware statutory investments as well. Also, investors and sponsors have to take care of several real estate costs too, including escrow, title, appraisal, environmental report, property condition report, and loan fees, etc. Moreover, some other costs that accompany the trust include:
- Acquisition Fees
- Reserves
- Financing Fees
- Asset management fees
- Property management fees
- Disposition fees
- Capital Expenditures
- Closing Costs
Guidelines for DST Sponsors
You already know that the sponsors are responsible for managing all-things DST. However, they have to follow a certain set of guidelines while doing so. Moreover, these help them regulate the trust efficiently and profitably. These guidelines include the following:
- No additional capital after the closing of DST offerings
- No renegotiation on the loan terms of DST
- Limited capital expense on standard repairs
- No reinvestment in the sales proceeds
- Investing cash reserves in short-term debt
- Timely distribution of cash proceeds
- No renegotiation of leases
Adhering to these rules can really help DST sponsors streamline all the operations related to the trust, investments, and portfolio.
Different Delaware Statutory Trust Investments
You should know that almost all kinds of commercial real estate properties can be considered DST properties. Moreover, DST investments usually consist of properties with high investment potential. The reason why a property or asset becomes a part of the DST is because of the high purchase price. Otherwise unaffordable, these assets become accessible to investors through a DST.
Did You Know?
The purchase prices of DST assets are usually as high as $30 to $100 million.
Furthermore, there are four main types of properties held as Delaware Statutory Trust Investments, including the following:
- Multifamily properties
- Office Buildings
- Industrial Properties
- Retail Properties
Apart from these, other institutional-grade assets include senior housing, medical office, and self-storage properties. Keep in mind, that investors can hold only a fraction of ownership through DST. Are you a DST investor? If so, investing in multiple DSTs can really diversify your profit streams.
Pros of Delaware Statutory Trust Investments
DST is a great way to acquire investment properties that are otherwise unattainable. Also, these directly involve 1031 exchanges. This means they offer the tax benefits associated with these property exchanges. Want to know what other perks they offer? Here are some of them:
DSTs allow investors to pool their resources and acquire larger investments that may not be feasible individually. Resultantly, this helps diversify their portfolio, reduce risks, and increase the potential return. Apart from this, Delaware Statutory Trust investments pass as 1031 exchange properties. Therefore, you save big on capital gain taxes too. As a result, your income potential increases even more. Need help regarding capital gains tax deferrals? You can go for our 1031 exchange service for that.
The most convenient thing about DSTs is that investors don’t have to worry about anything. After all, they don’t have to participate in the management or monitoring of the investments. The sponsors do it for you! All you have to do is acquire the ownership – and that’s it!! This is beneficial for those who are either planning a family, retirement, or a state transfer. It is so because in these phases, you already have a lot in your plate. So, not dealing with the management stuff is surely a perk.
Another amazing thing about the Delaware Statutory Exchange is the low risk of failure. After all, the sponsor has already purchased the assets after rigorous vetting. Therefore, there are low chances of participating in a risky exchange. Also, this is a shared investment. This means that the potential risk is also divided among the investors – just like the interest.
The overall process of acquiring DST assets is way quicker than that of an individual investment. It is so because the sponsor has already purchased the assets. You should know that DST deals are usually closed within 3 to 5 business days. This means you don’t have to wait for weeks or months to acquire a share in the trust.
Cons of Delaware Statutory Trust Investments
We have talked about all the major benefits of DST investments. However, you should know that they come with certain disadvantages too. Here are some of the factors that make investors rethink their choice:
It’s true that DST is a passive investment. But is it always an advantage? Well, not necessarily. As professionals are managing your investments, you don’t have a say in strategizing your investments. This can be an issue for those who prefer participating in property operations.
You should also know that DST investments have to be held for around 3 to 10 years. The total duration is usually set by the DST sponsor. Moreover, this elongated timeline makes the assets less liquid. Furthermore, in case you want to exit the trust early, you’ll have to sell your interest. Most importantly, this sale will also be a 1031 exchange.
DST investments usually come at a price. By this, I mean the additional costs. As an investor, you may have to pay future vacancy rates as well as interest rate fluctuations. As a result, your cash flow potential as well as the price appreciation will be reduced. Apart from these, investors may also have to cater to several administrative costs.
Conclusion
Delaware Statutory Trust Investments are a great way to increase your income potential through investments. The best part – you can invest in high-priced assets through DSTs. However, you only get a fraction of interest. Besides, this surely boosts your ROI and diversifies your portfolio. Also, these involve 1031 exchanges. So, there are less tax deductions and more capital gains. You can use the above guide and make a wise real estate decision for yourself.
