A Delaware Statutory Trust (DST) is a separate legal entity created as a trust under the laws of Delaware. Each DST is governed by a trust agreement that spells out the rights and obligations of the investors in the trust. Each owner of the trust has a pro rata interest in the trust, and is entitled to receive distributions from trust operations (e.g. rental income or sale proceeds). DST investors never personally hold title to any real property owned by the trust. Instead, title to any real property is held by the DST itself.
However, for purposes of Federal income tax law, each DST owner is also treated as owning an undivided fractional interest in any real property owned by the DST. Each owner’s fractional interest is proportionate to the owner’s financial investment in the DST. Although treated as owners of real property, DST investors do not have direct control over the real property, unlike a TIC, where investors have direct control. Instead, DST investors turn over responsibility for management and operation of the real property to a trustee.
For IRS purposes, any real property held by a DST is not precluded from qualifying as “like kind” replacement property in a 1031 exchange.
There are significant benefits to using a DST to purchase real property.
- Unanimous approval of the individual DST investors is not required. Instead, the DST trustee has the authority to take any required actions related to the property, including refinancing, repairs, negotiating leases, and selling the property.
- Limited personal liability. Due to their nature as a trust, a DST offers investors automatic limited liability relative to personal assets. There is no need for an individual investor to set up his or her own Limited Liability Corporation (LLC) to hold the interest in the DST, such as would be required with a TIC to enjoy the same protection.
- Easier financing. When the DST wishes to finance real property, a lender will consider only the DST as a single borrower. This is unlike a TIC, where a lender would be required to qualify every individual investor. Likewise, participation in a DST does not impact an investor’s personal credit rating.
- Lower minimum investment. A DST may have up to 499 investors, which dramatically decreases the minimum investment amount. While a DST sponsor will usually set an arbitrary minimum investment level (so as to keep the number of investors to a mangeable number), cash investment requirements are often far lower than with a TIC.
There are other benefits to a DST, so if you are considering participation in a DST it is important to speak with a qualified advisor to learn more.
The biggest risk with a DST is an investor turning over control of real property to the trustee. While the investor has a voice in the selection and continuation of the trustee, day-to-day decisions will be out of reach of the investors.
Like any investment, a DST is also subject to risks such as the incompetency or insolvency of the DST program sponsor, leasing or disposing of the property to a third-party, and inability to re-finance if that becomes necessary. Likewise, there is the risk of conflicts of interest among program sponsors, trustees or property managers, which could adversely impact the value of the real property.
To compare a DST with a TIC, click here.