008. Benefits of a Delaware Statutory Trust (DST)

Episode Transcript:

Over my years of working with investors in commercial real estate, I have witnessed the numerous benefits that investing in real assets can bring, including cash flow, tax deductions, diversification, and tax-free exchanges. Among the various ownership structures available, the Delaware Statutory Trust has emerged as a flexible and advantageous option for real estate ownership and investment strategies. Let's explore the features of DSTs and their potential benefits for investors and sponsors.

DSTs gained approval from the IRS in 2004, affirming that owning a beneficial interest in a properly structured DST is equivalent to owning an undivided interest in the underlying real estate assets. The concept of a DST is fairly straightforward: it allows multiple investors to collectively purchase and hold real estate assets through a trust organized and managed by a trustee, who is typically the sponsor. Investors, known as beneficiaries, acquire an undivided interest in the property held by the DST. Most importantly, beneficiaries can utilize a beneficial interest in a DST as replacement property in a 1031 exchange, providing the same deferred tax advantages.

While a DST may appear similar to a Tenants-in-Common structure, it operates more like a Limited Liability Company. Like LLC members, DST beneficiaries enjoy protection from personal liability for the actions of the trust and are entitled to their proportionate share of income, deductions, losses, and cash flow from the investment. The DST is governed by a trust agreement, placing management responsibilities in the hands of the trustee or an independent manager, with limited involvement required from the beneficiaries.

Compared to TIC structures, DSTs offer several advantages. TIC structures often face financing challenges due to limitations on the number of investors and the requirement for each TIC investor entity to obtain lender financing, whereas DSTs have a single loan, eliminating the need for underwriting each beneficiary. Additionally, TIC structures require unanimous voting, potentially causing delays or obstacles, while DSTs have centralized management, removing concerns about individual investors impeding decision-making processes.

It's important to note that DSTs and their trustees must adhere to a set of IRS restrictions known as the "Seven Deadly Sins." These restrictions include limitations on capital contributions, financing, reinvestment, and leasing activities after the DST is closed. While these restrictions exist, they can be mitigated with the guidance of experienced legal counsel and tax advisors. Techniques such as master leases and springing LLCs can be employed to address specific issues and optimize the DST structure.

Further advantages of DSTs include providing sponsors with an additional source of equity and offering flexibility in 1031 exchanges upon sale. Each beneficiary, including the sponsor, can execute a 1031 exchange of their respective proceeds without requiring consent from others in the trust. This flexibility allows sponsors to pursue new projects with greater capital, while investors can continue their tax-deferred investments by trading into another DST, which contributes to the growth of DSTs and the attraction of billions of dollars in 1031 equity.

Considering the unique structure and requirements of DSTs, it's crucial to engage experienced legal counsel and tax professionals who can ensure proper structuring to maximize the benefits. DSTs are gaining popularity, and their tax advantages make them an appealing option for sponsors and investors, alike. So, next time you have a sale with potential capital gains and can't find a replacement property, consider looking into a Delaware Statutory Trust.

This is Tyler Cauble, signing off.