DELAWARE STATUTORY TRUST REAL ESTATE INVESTMENTS

A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under the laws of Delaware in which each owner has a “beneficial interest” in the DST for Federal income tax purposes and each owner is treated as owning an undivided fractional interest in the property. In 2004, the IRS released Revenue Ruling 2004-86 which allows the use of a DST to acquire real estate
where the beneficial interests in the trust will be treated as direct
interests in replacement property for purposes of IRC §1031.*
Because DST opportunities are often “packaged” by a sponsor with management and financing in place, DSTs offer efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.
DST properties provide an opportunity for diversification, and low equity requirements that may allow smaller individual investors to invest in large institutional investment properties. But, DSTs involve additional costs over the costs of direct ownership. Income generated from a DST property may be sheltered from tax through using depreciation and interest deductions.

Potential Advantages of 1031 DSTs

Generally, 1031 exchanges and DSTs are attractive in that they allow:
1. Lower Minimums – Lower required investment minimums than a traditional TIC investment. DSTs allow for a larger number of investors (up to 499), which reduces the minimum required investment.Easier Financing – Easier to finance than a traditional TIC investment. In a DST the lender does not need to underwrite or qualify any of the individual investors, as they are isolated from the operation of the property. The sponsor will generally be the signatory trustee of the DST. A traditional TIC investment requires that the investor sign loan documents.

2. Lower Fees – Lower ongoing fees than a traditional TIC investment. In a TIC, annual Single Purpose Entity (SPE) maintenance fees are required. They are eliminated in a DST because an SPE is not required.

Potential Risks of 1031 DSTs

(Please refer to the risks in the 1031 TIC section as these same risks apply to 1031 DST Investments.)
1. Trustee Management – Beneficial Owners possess limited control and rights. The trust will be operated and managed solely by the Trustee. Beneficial Owners have no right to participate in the management of the trust.

2. Title – Beneficial Owners do not have legal title. Beneficial Owners do not have right to sell the property.

3. Real Estate – Risks related to an investment in real estate. Real property investments are subject to varying degrees of risks including but not limited to: the speculative market and financial risks associated with fluctuations in the real estate market; loss of principal; variations in occupancy which may negatively impact cash flow; limited liquidity; limits on management control of the property; and changes in the value of the underlying investments.

4. Seven Deadly Sins of Delaware Statutory Trusts – If one of the Seven Deadly Sins is committed, certain actions may occur that would likely preclude the investor from conducting further 1031 exchanges and may adversely impact the value of their investment.

– Once the offering is closed, there can be no future contribution to the DST by either current or new Beneficial Owners.
– The Trustee cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any party.
– The Trustee cannot reinvest the proceeds from the sale of its real estate.
– The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements, and (c) those required by law.
– Any cash held between distribution dates can only be invested in short-term debt obligations.
– All cash, other than necessary reserves, must be distributed on a current basis.
– The Trustee cannot enter into new leases or renegotiate the current leases.