DSTs are unique real estate investment vehicles that allow a group of individual investors to purchase fractional interests in large commercial real estate assets that typically would be well beyond their financial reach as solo investors. DST investors don’t actually own physical real estate, however – they own shares of a trust that was formed specifically to be the legal owner of the underlying properties held within the trust. This distinction is important because of the legal separation it creates between the trust and the pool of DST investors.
Below we’ll take a closer look at how Delaware Statutory Trusts work and why they are investment options for 1031 exchange and other types of real estate investors. We’ll also examine the importance of timing as it relates to DST investments, as well as how to conduct due diligence on prospective DST sponsors.
What Is a Delaware Statutory Trust?
Delaware Statutory Trusts are legal entities created under the statutes of Delaware trust law. DST investors, also called beneficiaries, own fractional (beneficial) interests in the trust, which is the legal owner of the trust’s underlying properties. However, since the Internal Revenue Service treats each investor’s beneficial interests as direct property ownership, DSTs are eligible for 1031 exchanges both upfront and upon exit.
DSTs are typically formed by real estate companies called sponsors, who identify and acquire the assets that are placed under trust using their own capital. DST sponsors engage a registered broker-dealer to open an offering period, and individual investors purchase fractional shares of the DST. Although they provide equity capital, DST beneficiaries are passive investors. DSTs can theoretically have an unlimited number of beneficiaries, though the number usually is capped at 499 by the DST sponsor.
History of DSTs
Delaware Statutory Trusts were created in 1988 with the passing of the Delaware Business Trust Act, which was renamed the Delaware Statutory Trust Act in 2002.
These special business trusts create a legally secure and clearly defined trust entity that establishes legal separation between the trust and its beneficiaries. Since the trust is recognized as a separate legal entity from its beneficiaries, creditors cannot seize or possess any assets held under trust.
Potential Benefits of Investing in a Delaware Statutory Trust
The fractional ownership structure of Delaware Statutory Trusts gives solo investors access to commercial-grade real estate assets that are similar to those owned by institutional investors, insurance companies, pension funds and real estate investment trusts (REITs). These properties may include large Class-A multifamily apartment complexes, office buildings, retail centers, industrial distribution and warehousing facilities, self-storage facilities and similar commercial assets.
Some additional benefits of investing in a DST …….