DST Essentials
Delaware Statutory Trusts for Real Estate Investors
A Delaware Statutory Trust, commonly referred to as a DST, provides investors with a way to own a beneficial interest in professionally managed real estate without purchasing and managing an entire property individually.
For real estate investors considering a change from direct property ownership, DSTs can provide another investment structure to evaluate. They are also commonly considered by accredited investors looking for potential replacement property as part of a 1031 exchange.
Customized 1031 helps investors understand how DSTs work, how they may fit within a broader real estate strategy, and what should be evaluated before making an investment decision.
01
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust is a legal trust structure formed under Delaware law that can be used to own real estate and other assets.
In a real estate DST, the trust owns the underlying property or properties. Investors purchase beneficial interests in the trust rather than individually purchasing the entire property.
This allows multiple investors to participate in an investment while the underlying real estate is operated according to the structure established by the trust and its sponsor
In a real estate DST, the trust owns the underlying property or properties. Investors purchase beneficial interests in the trust rather than individually purchasing the entire property.
This allows multiple investors to participate in an investment while the underlying real estate is operated according to the structure established by the trust and its sponsor
02
How Does a DST Real Estate Investment Work?
A DST sponsor generally identifies or acquires the underlying real estate, establishes the trust, structures the offering, and arranges property management and financing when applicable.
Eligible investors can then purchase beneficial interests in the trust.
The specific property, financing, distribution structure, fees, expected holding period, minimum investment, and other terms vary by offering.
Investors should review the applicable offering documents before making an investment decision.
Eligible investors can then purchase beneficial interests in the trust.
The specific property, financing, distribution structure, fees, expected holding period, minimum investment, and other terms vary by offering.
Investors should review the applicable offering documents before making an investment decision.
03
Can a DST Be Used in a 1031 Exchange?
Certain properly structured DST interests may qualify as replacement property in a Section 1031 exchange.
IRS Revenue Ruling 2004-86 concluded that, under the specific structure and circumstances described in the ruling, beneficial owners were treated as owning interests in the underlying real property for federal tax purposes. The ruling also concluded that acquisition of such an interest could qualify under Section 1031 when the other requirements of the exchange were satisfied.
This is one reason DSTs have become a replacement property strategy considered by some 1031 exchange investors.
IRS Revenue Ruling 2004-86 concluded that, under the specific structure and circumstances described in the ruling, beneficial owners were treated as owning interests in the underlying real property for federal tax purposes. The ruling also concluded that acquisition of such an interest could qualify under Section 1031 when the other requirements of the exchange were satisfied.
This is one reason DSTs have become a replacement property strategy considered by some 1031 exchange investors.
04
Does Every Delaware Statutory Trust Qualify for a 1031 Exchange?
No. The fact that an investment is called a Delaware Statutory Trust does not automatically mean an interest in it will receive Section 1031 treatment.
Revenue Ruling 2004-86 addresses a particular DST structure with specific restrictions and characteristics. Investors considering a DST for a 1031 exchange should confirm that the offering has been structured for that purpose and work with their own Qualified Intermediary and tax professionals regarding their exchange.
Revenue Ruling 2004-86 addresses a particular DST structure with specific restrictions and characteristics. Investors considering a DST for a 1031 exchange should confirm that the offering has been structured for that purpose and work with their own Qualified Intermediary and tax professionals regarding their exchange.
05
Who Can Invest in a DST?
Eligibility depends on the specific offering. Many DST real estate opportunities are offered through private securities offerings and may be limited to accredited investors.
Under current SEC criteria, an individual may qualify as an accredited investor through specified income or net worth thresholds or through certain professional credentials. Entities can also qualify under several separate criteria.
Meeting the eligibility requirements to invest does not mean that a particular DST is suitable for an individual investor.
Under current SEC criteria, an individual may qualify as an accredited investor through specified income or net worth thresholds or through certain professional credentials. Entities can also qualify under several separate criteria.
Meeting the eligibility requirements to invest does not mean that a particular DST is suitable for an individual investor.
06
What Types of Property Can a DST Own?
Eligibility depends on the specific offering. Many DST real estate opportunities are offered through private securities offerings and may be limited to accredited investors.
Under current SEC criteria, an individual may qualify as an accredited investor through specified income or net worth thresholds or through certain professional credentials. Entities can also qualify under several separate criteria.
Meeting the eligibility requirements to invest does not mean that a particular DST is suitable for an individual investor.
Under current SEC criteria, an individual may qualify as an accredited investor through specified income or net worth thresholds or through certain professional credentials. Entities can also qualify under several separate criteria.
Meeting the eligibility requirements to invest does not mean that a particular DST is suitable for an individual investor.
07
What Types of Property Can a DST Own?
DST offerings can involve many types of commercial real estate. Depending on available investments, properties may include:
Some DSTs hold a single property, while others may provide exposure to more than one asset.
Investors should evaluate the specific real estate rather than assuming one property type or DST structure is inherently appropriate.
- Multifamily communities
- Industrial real estate
- Self-storage properties
- Healthcare real estate
- Retail properties
- Office properties
- Hospitality assets
- Other commercial real estate
Some DSTs hold a single property, while others may provide exposure to more than one asset.
Investors should evaluate the specific real estate rather than assuming one property type or DST structure is inherently appropriate.
08
Do DST Investors Have to Manage the Property?
Generally, individual DST investors do not handle the day-to-day operation of the underlying property.
Management responsibilities are typically handled through the sponsor, trustee, and property management arrangements associated with the investment.
For investors who are accustomed to dealing with tenants, leases, repairs, maintenance, and other landlord responsibilities, this can create a substantially more passive ownership experience.
The tradeoff is that DST investors also have significantly less control over property-level decisions than they would with directly owned real estate.
Management responsibilities are typically handled through the sponsor, trustee, and property management arrangements associated with the investment.
For investors who are accustomed to dealing with tenants, leases, repairs, maintenance, and other landlord responsibilities, this can create a substantially more passive ownership experience.
The tradeoff is that DST investors also have significantly less control over property-level decisions than they would with directly owned real estate.
09
Can a DST Provide Investment Income?
DST properties may generate operating income that can support distributions to investors according to the structure of the offering.
However, distributions are not guaranteed.
Property performance, vacancies, tenant defaults, operating expenses, financing costs, market conditions, unexpected repairs, and other factors can affect the amount of cash available for distribution.
Investors should distinguish between projected distributions and guaranteed income. They are not the same.
However, distributions are not guaranteed.
Property performance, vacancies, tenant defaults, operating expenses, financing costs, market conditions, unexpected repairs, and other factors can affect the amount of cash available for distribution.
Investors should distinguish between projected distributions and guaranteed income. They are not the same.
10
How Long Do DST Investments Last?
There is no universal DST holding period. The anticipated investment period depends on the specific property, sponsor strategy, market conditions, financing, and terms of the offering.
A sponsor may have an anticipated holding period, but the actual disposition can occur earlier or later depending on circumstances.
Investors should generally approach DSTs as longer-term, illiquid investments rather than assuming their capital will be available on a particular date.
A sponsor may have an anticipated holding period, but the actual disposition can occur earlier or later depending on circumstances.
Investors should generally approach DSTs as longer-term, illiquid investments rather than assuming their capital will be available on a particular date.
11
Can I Sell My DST Interest Whenever I Want?
Investors should not assume they can easily sell a DST interest. DST interests are generally not traded on a liquid public securities market. Private placements can have significant liquidity limitations, and FINRA identifies private placement liquidity as an important consideration for investors.
An investor who expects to need access to the invested capital in the near future should carefully consider whether this type of investment aligns with that need.
An investor who expects to need access to the invested capital in the near future should carefully consider whether this type of investment aligns with that need.
12
How Much Money Is Required to Invest in a DST?
Minimum investment requirements vary from one DST offering to another. Because investors purchase beneficial interests rather than acquiring an entire commercial property, the required investment may be substantially lower than the amount needed to purchase comparable real estate individually.
Investors should review the minimum investment requirement for each specific offering.
Investors should review the minimum investment requirement for each specific offering.
13
Can I Invest in More Than One DST?
Potentially, yes. An eligible investor may be able to allocate capital among multiple DST offerings rather than investing everything into one trust.
For some investors, this can provide exposure to different properties, markets, sponsors, or real estate sectors.
When DSTs are being acquired through a 1031 exchange, the investor must also comply with the applicable identification, timing, and other exchange requirements.
For some investors, this can provide exposure to different properties, markets, sponsors, or real estate sectors.
When DSTs are being acquired through a 1031 exchange, the investor must also comply with the applicable identification, timing, and other exchange requirements.
14
Can I Combine a DST With Directly Owned Replacement Property?
Potentially. A 1031 exchange does not necessarily require an investor to place all exchange proceeds into a single replacement asset. Depending on the exchange structure and applicable requirements, an investor may consider a combination of directly owned real estate and qualifying DST interests.
Whether that approach is appropriate depends on the individual exchange, investment objectives, available properties, and tax considerations.
Whether that approach is appropriate depends on the individual exchange, investment objectives, available properties, and tax considerations.
15
Do DST Investments Use Debt?
Some do and some do not. DST offerings may involve property-level financing, while others may have little or no leverage.
Financing can materially affect an investment's projected performance, risk profile, and relevance within a 1031 replacement property strategy.
Investors should understand the amount of debt, financing terms, maturity schedule, interest rate exposure, and other relevant considerations associated with the specific offering.
Financing can materially affect an investment's projected performance, risk profile, and relevance within a 1031 replacement property strategy.
Investors should understand the amount of debt, financing terms, maturity schedule, interest rate exposure, and other relevant considerations associated with the specific offering.
16
What Are the Main Risks of a DST Investment?
DSTs involve both real estate investment risk and risks associated with the investment structure.
Depending on the offering, important considerations may include:
Private placements also involve regulatory and due diligence considerations. FINRA's current guidance emphasizes the importance of evaluating the issuer, management, underlying assets, claims made about the investment, conflicts, and other relevant factors when private placements are recommended.
Depending on the offering, important considerations may include:
- Limited liquidity
- Loss of principal
- Changes in property values
- Reduced or suspended distributions
- Tenant and vacancy risk
- Financing and leverage risk
- Sponsor and management risk
- Fees and expenses
- Limited investor control
- Market and economic conditions
Private placements also involve regulatory and due diligence considerations. FINRA's current guidance emphasizes the importance of evaluating the issuer, management, underlying assets, claims made about the investment, conflicts, and other relevant factors when private placements are recommended.
17
What Fees Are Associated With DST Investments?
The fee structure varies by offering. Costs may include expenses associated with acquiring and financing the real estate, structuring the offering, securities distribution, property management, asset management, and eventual disposition.
Fees can affect investor returns and should be evaluated as part of the overall economics of an opportunity.
The applicable offering documents should describe the material fees, expenses, and compensation associated with a specific investment.
Fees can affect investor returns and should be evaluated as part of the overall economics of an opportunity.
The applicable offering documents should describe the material fees, expenses, and compensation associated with a specific investment.
18
How Much Control Does a DST Investor Have?
DST investors generally have considerably less property-level control than direct real estate owners. That limitation is part of the structure.
Revenue Ruling 2004-86 describes important restrictions on the powers of the trustee in the DST structure addressed by the ruling. Those restrictions help distinguish the trust described in the ruling from an active business entity for federal tax purposes.
Investors who strongly value control over leasing, financing, improvements, property management, and sale decisions should consider this difference carefully.
Revenue Ruling 2004-86 describes important restrictions on the powers of the trustee in the DST structure addressed by the ruling. Those restrictions help distinguish the trust described in the ruling from an active business entity for federal tax purposes.
Investors who strongly value control over leasing, financing, improvements, property management, and sale decisions should consider this difference carefully.
19
What Happens When the DST Property Is Sold?
The outcome depends on the specific trust and offering. Generally, when the underlying real estate is eventually sold, the trust addresses its liabilities, costs, and other obligations, and applicable net proceeds are distributed according to the terms of the investment.
The resulting tax consequences will depend on the investor's individual circumstances.
An investor who wants to pursue another 1031 exchange after a DST disposition should discuss the applicable requirements with their Qualified Intermediary and tax professional before taking action.
The resulting tax consequences will depend on the investor's individual circumstances.
An investor who wants to pursue another 1031 exchange after a DST disposition should discuss the applicable requirements with their Qualified Intermediary and tax professional before taking action.
20
Is a DST the Same as a REIT?
No. Although both can provide exposure to real estate without personally managing individual properties, Delaware Statutory Trusts and Real Estate Investment Trusts are different structures.
DST investors acquire beneficial interests in a trust holding specific real estate under the applicable offering structure.
REITs operate under a separate legal and tax framework and can include publicly traded, non-traded, and private structures.
Investors should not assume that the ownership, liquidity, tax treatment, management, or investment characteristics of a DST and a REIT are interchangeable.
DST investors acquire beneficial interests in a trust holding specific real estate under the applicable offering structure.
REITs operate under a separate legal and tax framework and can include publicly traded, non-traded, and private structures.
Investors should not assume that the ownership, liquidity, tax treatment, management, or investment characteristics of a DST and a REIT are interchangeable.
21
How Do I Evaluate a DST Opportunity?
Start with the investment itself. Important areas to review may include:
Many DST opportunities are private securities offerings. Current FINRA guidance emphasizes reasonable investigation of private placements, including the issuer and management, business prospects, underlying assets, investment claims, and intended use of proceeds.
The DST structure alone should never substitute for evaluating the actual investment.
- The underlying property or properties
- Location and market conditions
- Tenants and lease structure
- Sponsor experience
- Financing and leverage
- Fees and expenses
- Projected distributions
- Investment assumptions
- Liquidity limitations
- Expected holding period
- Potential exit strategy
- Material conflicts and risks
Many DST opportunities are private securities offerings. Current FINRA guidance emphasizes reasonable investigation of private placements, including the issuer and management, business prospects, underlying assets, investment claims, and intended use of proceeds.
The DST structure alone should never substitute for evaluating the actual investment.
22
Is a DST Right for Every Investor?
No. A DST may appeal to investors who want continued exposure to real estate while reducing active property management responsibilities.
Other investors may prefer the control and flexibility associated with owning real estate directly.
Factors such as liquidity needs, investment horizon, income objectives, risk tolerance, management preferences, existing portfolio, and overall financial circumstances can all affect whether a DST deserves consideration.
The decision should be based on the specific investor and specific investment, not simply on the availability of a DST.
Other investors may prefer the control and flexibility associated with owning real estate directly.
Factors such as liquidity needs, investment horizon, income objectives, risk tolerance, management preferences, existing portfolio, and overall financial circumstances can all affect whether a DST deserves consideration.
The decision should be based on the specific investor and specific investment, not simply on the availability of a DST.
Have Another Question?
Understanding how Delaware Statutory Trusts work is only the first step. The next question is whether a particular investment and ownership structure fit your objectives.
If you are considering a DST as part of a 1031 exchange or broader real estate strategy, Doug Zator can help you evaluate the options available for consideration.