The Delaware Statutory Trust (commonly known as the DST) is, as the name suggests, a legal entity created as a trust under the laws of the state of Delaware. A DST is created for real estate investment purposes and is particularly useful in a 1031 exchange.
In the context of a TSD, investors each have a proportional share of the TSD itself. The DST, in turn, holds the rights to various real estate interests and distributes to investors the potential income from the properties (in the form of rental income or the sale of the property) in proportion to their share of ownership in the DST.
The DST, through its signatory trustee, makes all decisions relating to the property held by the trust, freeing investors from this responsibility. One important thing to note about the summer time is that the trust is not considered a taxable entity. As a result, all profits or losses are transferred to investors in the trust.
With respect to 1,031 exchanges, the IRS has determined that any beneficial interest in the DST is treated as identical to a direct interest in real estate. This means that the properties held by DST fully fulfill the requirements for 1031 exchanges, provided that the other requirements of such exchange are also fulfilled.
For investors who do not seek accountability for day-to-day management and real estate decision-making authority, a TSD may be an excellent choice.
Benefits of a DST
One of the main reasons why investors are so interested in buying an interest in a TSD is the advantage of owning securitized real estate. However, a DST also provides other benefits to investors.
Eliminates the requirement of unanimous approval
Unlike a common rental ownership structure, a DST does not require the unanimous approval of all investors for making decisions about the real estate held. For example, if the economic environment requires the prompt sale of a parcel of land owned by the DST, the decision-making power to register or sell the property belongs to the DST&39;s signatory trustee rather than to the property. to the investors themselves.
Limited personal liability
Due to the "bankruptcy" provision of each hour of hour, individual investors enjoy limited liability with respect to their personal assets. In case of bankruptcy and failure of the DST, the biggest risk to an individual investor is his investment in the trust. The creditors of the trust can not reach any other assets of an investor.
In order to finance the purchases made by the DST, the lenders treat the DST as a single borrower (rather than scrutinizing each individual investor). This makes financing easier and less expensive to obtain. Similarly, since the individual investor is not subject to credit screening, his individual rating is not affected by participation in a DST.
Requirements for loan forgiveness
Since the rights of a DST investor are limited to receiving distributions and the investor has no voting rights in connection with daily operations, the investor fraud exceptions are eliminated for individual investors. Any lender will only turn to the trustee or signatory sponsor for these waivers.
Lower minimum investment
A DST is allowed up to 499 individual investors, which allows the minimum investment amounts to be well below those of an ICT (allowing only up to 35). This allows investors with fewer investments to continue to participate in a shared ownership strategy for real estate investments.
Risks of a DST
A DST offers many benefits to an investor that are not found in other types of real estate investments in shared ownership. However, DSTs do not carry certain risks, like any other investment.
One of the main risks to consider is the use of a program sponsor to manage the investment. Unlike a common leasing system (TIC) in which individual investors have their say, investors in a DST surrender the day-to-day decision-making power to the program sponsor. This means that if the program sponsor made reckless decisions or became insolvent, the DST could fail without any significant contribution from individual investors.
In addition, as with any investment, the use of a DST for exchange 1031 carries tax risks. Although DSTs are often ideal for this purpose, there is no guarantee regarding the IRS. It is still possible that the IRS does not approve the DST structure or a particular 1031 exchange.
Although the benefits of a DST tend to outweigh the risks, it is prudent to fully understand both when deciding whether or not to participate in a DST.