Delaware Statutory Trust (DST)
Property owners – baby boomers in particular – often find themselves at a point when they’re seeking more passive investment opportunities. Because of this, Tenants in Common (TIC) investment strategy and DSTs have become a preferred investment choice for 1031 exchangors. Delaware Statutory Trusts, provide passive, professionally managed properties that allow owners to enjoy passivity and a steady monthly income.
To discuss your questions regarding DSTs with an advisor, we invite you to contact 1031 Exchange Place. We can also help you find the best DST properties to meet your investment criteria. For a more detailed overview of DST investments, download our FREE E-Book. Simply fill out the form at the bottom of this page with your name and email. Don’t worry, we don’t spam our clients.
DST Investment Overview
DST investments have become the preferred investment vehicle for 1031 exchanges. Most of the popularity has come since IRS revenue ruling 2004-86 back in the year 2004 when the IRS determined that a Delaware Statutory Trust would now qualify as a “like-kind” exchange property for a 1031 exchange. A Delaware Statutory Trust or more commonly known as a “DST”, is a separate legal entity, created as a trust, that is used to hold title to investment real estate – similar in some ways to how LLC can hold title to real estate.
Under the IRS ruling, DST investments are allowed to own 100% of the fee-simple interest in real estate and allow up to 100 investors to participate as beneficial owners of the property. One primary benefit to DST investments is the typical minimum investment is as low as $100,000. This allows an investor to diversify his/her exchange proceeds among multiple properties. Another significant benefit is that DST property investments have various leverage ratios that can more easily satisfy an investor’s exchange requirements of taking on equal or greater debt.
The typical loan-to-value (LTV) of non-recourse financing is around 50%; however, there are DSTs available at varying LTVs, and many are offered for all cash/no debt in order to eliminate all financing risks.
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The DST sponsor acquires the property within the trust and opens the trust for potential investors to purchase a beneficial interest. DST investors may benefit from a professionally managed, potentially institutional-quality property. The properties could be a 300-unit apartment building, a 50,000-square-foot medical office property, a pool of net leased properties with Fortune 500 tenants, or even a land lease hosting acres of solar panels. Most DST investments are assets that your average investor could not otherwise afford. However, by pooling money with other investors, they can access higher-grade real estate. Beneficial owners of a DST have no say in how properties are managed or even when they’re liquidated. To most, this is a good thing – after all, what they’re interested in is passive income – not managing a real estate portfolio. The benefit of this is that the real estate is managed by an experienced team that also has a vested interest in the performance of the portfolio.
Investors who are familiar with the tenants in common (TIC) format may see some similarities with the concept of DSTs; however, it’s important to learn the differences between the two concepts. The most basic difference is that a TIC co-owners each own an undivided, pro-rata share of the title to the property, while a DST may have up to 100 investors (and sometimes more), with each investor owning a beneficial interest in the trust which, in turn, owns the underlying asset(s).