Many investors have heard of real estate investment trusts (REITs), crowdfunding and real estate funds as common paths to real estate investing. However, if you’re interested in adding high-quality real estate to your portfolio, there’s another investment vehicle you could consider. Delaware Statutory Trusts (DSTs) give investors fractional ownership in institutional-quality real estate. DSTs come with many benefits that investors may find appealing, such as tax benefits and a predetermined management structure.
What is a Delaware Statutory Trust (DST)?
A Delaware Statutory Trust is an investment vehicle that makes high-quality real estate accessible to a larger range of investors. The trust is formed by a real estate company, then individuals invest in the trust. The group of investors all own shared interests but don’t own a specific fraction of the property. This way, no investor can claim full ownership.
DSTs are used to purchase various types of real estate. DST properties are typically institutional-quality, which are normally inaccessible to individual investors. DSTs allow individuals to purchase ownership of these high-quality assets for a much lower minimum investment.
Formation and Structure of DST Properties
DSTs are first created by a real estate company, referred to as the DST sponsor. It identifies potential properties for the trust and carefully vets them before including them. A DST may finance, find a property manager and identify a tenant before creating the trust agreement.
Once the properties are selected and the trust is formed, the DST coordinates with broker-dealers to raise equity and identify investors. The governing trust agreement is formed, allowing the DST sponsor to act as a trustee on behalf of the beneficiaries. The investors become the beneficiaries and own beneficial interest in the trust. The DST sponsor holds and manages the assets, and investors receive passive income based on the income of the trust.
Operational Procedures
Income is generated for the DST and its investors through rent payments and sales of properties within the trust. DST investors are paid regularly, making these trusts a great form of passive income. The sponsor does all the hard tasks, including managing the properties, completing the paperwork and executing sales and purchases.
The DST sponsor is typically an expert real estate company, meaning it thoroughly vets every property before including it in the trust. Investors can rest assured all due diligence is being completed. However, before investing in a trust, investors should research the sponsor’s track record with DSTs and understand its experience and areas of expertise.
1031 Exchange and DSTs
One of the biggest advantages of a DST is that it’s eligible for a 1031 exchange. 1031 exchanges allow investors to defer paying taxes on income generated from real estate if the capital is used to invest in a like-kind property. If investors get capital gains from a property, they can defer paying taxes on it by investing in a DST trust as a replacement property.
Investment Opportunities and Benefits of a DST
DSTs are a unique investment and provide a lot of advantages to investors. DSTs typically contain institutional-quality investment properties that would usually require substantial capital to invest in, as well as require being involved in its management. DSTs allow exposure to these properties for a lower investment cost and without the need for finding management and
They also allow investors to potentially diversify their real estate holdings. DSTs can contain commercial properties, retail, residential complexes and oil and gas projects. These properties may be hard to invest in through other vehicles.
Delaware Statutory Trusts are a truly passive investment. The sponsor handles all the heavy lifting. Once the investor makes their initial investment, they’ll receive regular income payments to grow their portfolio. And their eligibility for 1031 exchanges can make a huge difference in paying capital gains taxes.
Risks and Considerations
Delaware Statutory Trusts have many benefits, but there is no such thing as a perfect investment. DSTs aren’t without risks, and their structure may not be compatible with every portfolio. For example, DSTs are illiquid. Once an investment is made, it is nearly impossible for investors to exit the trust before its set time horizon.
Additionally, active investors may not like the lack of control. DST sponsors handle all aspects of asset management, and the beneficiaries don’t have a say or any control. Investors need to do their due diligence and ensure they trust the sponsor before signing the trust agreement.
Many investors like that these trusts provide exposure to high-quality assets. However, even institutional-grade properties aren’t free from the impact of market fluctuations. If the real estate market has a drastic downturn, the trust may not provide the expected performance. DSTs come with risk.
Before investing in a DST, investors need to complete thorough research of the sponsor and the trust. They should consult with their financial professional to thoroughly read the agreement, the private placement memorandum and other associated documents.
Include Institutional-Quality Assets in Your Portfolio
Real estate is an enticing market for many investors. However, it can be hard to select and find high-quality projects and funds to invest in. DSTs help individual investors get exposure to properties that are typically reserved for institutional investors. With their income structure and tax advantages, they may be a good fit for certain portfolios. Before investing in any new vehicle, it’s a good idea to consult with your advisor for personalized advice.
Frequently Asked Questions
What are DST properties?
DST properties are properties held within a Delaware Statutory Trust. They are typically institutional-quality properties that are otherwise hard for individual investors to access.
Are DST a good investment?
A DST may be a good investment if the investors can handle the illiquidity and trust the DST sponsor. However, market fluctuations will always pose a risk.
Can a Delaware Statutory Trust be a custody for securities?
DSTs don’t use custodians. The DST sponsor acts as a trustee and the investors become beneficiaries of the trust.
About Savannah Munholland
Savannah Munholland is an investment writer passionate about helping people learn more about accessible alternative investments. She has more than three years of writing experience, focusing on alternative and traditional investing, technology, and education. Her expertise in writing about art and wine investments is grounded in an MFA with knowledge of and immersion in a wide range of art-related topics. She uses her skills in creative writing to bring an appealing level of interest to her journalistic work, shifting even the most basic financial and investment topics from humdrum to compelling. Her work has been published on Benzinga, FreightWaves, and Study.com.
