Understanding Delaware Statutory Trusts
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.
What Is a Delaware Statutory Trust?
A Delaware Statutory Trust is a legal trust structure formed under Delaware law that can be used to hold real estate and other assets.
In a real estate DST, the trust owns the underlying property or properties, while individual investors purchase beneficial interests in the trust.
Instead of owning and operating an entire property themselves, investors participate alongside other beneficial owners while the real estate is professionally managed according to the structure of the offering.
DSTs can be used to hold a variety of commercial real estate investments and have become one structure considered by investors seeking professionally managed real estate ownership.
How Does a DST Investment Work?
A DST sponsor typically identifies or acquires the real estate, establishes the trust, arranges financing when applicable, and structures the investment offering.
Investors then acquire beneficial interests representing a fractional ownership interest in the trust and its underlying real estate.
Day-to-day property operations are generally handled on behalf of the trust rather than by each individual investor. The specific structure, management arrangements, financing, distribution policies, expenses, and investment terms vary by offering and should be reviewed carefully before investing.
For investors accustomed to directly owning rental or commercial property, this creates a different ownership experience. Rather than personally handling leasing, maintenance, tenant issues, property management, and other operational responsibilities, those functions are generally handled through the DST structure and its property management arrangements.
What Types of Real Estate Can a DST Own?
DST offerings may involve many types of income-producing commercial real estate.
Depending on available offerings, underlying properties may include:
- Multifamily communities
- Industrial properties
- Self-storage facilities
- 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 multiple properties.
The property type alone does not determine whether a DST is an appropriate investment. Investors should also evaluate the location, tenants, leases, financing, sponsor, market conditions, fees, business plan, and other risks associated with the specific offering.
Why Do Real Estate Investors Consider Delaware Statutory Trusts?
Investors consider DSTs for different reasons.
For some property owners, the appeal begins with the ability to maintain exposure to investment real estate without continuing to manage another property directly.
Others may be interested in accessing real estate that would be difficult to purchase individually or dividing investment capital among more than one property or offering.
Depending on the investor and the specific opportunity, reasons for evaluating a DST may include:
- Reducing direct property management responsibilities
- Maintaining exposure to investment real estate
- Accessing professionally managed properties
- Diversifying real estate investments
- Evaluating multiple replacement property opportunities
- Transitioning away from active landlord responsibilities
- Exploring an alternative to purchasing another property individually
These potential characteristics should always be weighed against the risks and limitations of the investment.
Delaware Statutory Trusts and 1031 Exchanges
DSTs have an important connection to Section 1031 exchanges.
IRS Revenue Ruling 2004-86 addressed a specific Delaware Statutory Trust structure and concluded that, under the facts described in the ruling, an investor’s beneficial interest could be treated as an interest in the underlying real property for federal tax purposes. This allows certain properly structured DST interests to potentially serve as replacement property in a qualifying Section 1031 exchange.
That does not mean every trust or every DST investment automatically qualifies for 1031 treatment. The structure of the trust and the investor’s exchange must satisfy the applicable requirements.
For accredited investors selling investment real estate, DSTs may therefore be one replacement property strategy worth considering alongside directly owned real estate and other qualifying options.
A Different Approach to Real Estate Ownership
Direct property ownership gives investors significant control, but it can also come with significant responsibility.
Owners may need to deal with leasing, tenant relationships, repairs, capital improvements, financing, property management, and eventual disposition.
A DST creates a different relationship with the underlying real estate.
Investors generally do not participate in the day-to-day management of the property. This can make the structure attractive to investors who want continued real estate exposure but no longer want the responsibilities associated with being an active landlord.
That reduced level of control is also an important consideration. Investors are relying on the sponsor, trustee, property management arrangements, and the performance of the underlying real estate rather than making operating decisions themselves.
Important Considerations Before Investing in a DST
DSTs should not be viewed simply as a more convenient version of directly owned real estate.
They are investments with their own risks, costs, and structural limitations.
Before considering a DST, investors should understand factors such as:
Liquidity
DST interests generally should be considered long-term investments. Investors should not assume they will be able to easily sell an interest whenever they choose.
Underlying Real Estate
Performance ultimately depends in meaningful part on the properties held by the trust, including occupancy, tenants, rents, expenses, market conditions, and eventual disposition.
Sponsor Experience
The experience, track record, financial condition, and approach of the sponsor are important parts of evaluating an offering.
Financing
Some DST properties use leverage while others may be offered without property-level debt. Financing can affect both potential outcomes and investment risk.
Fees and Expenses
DST offerings can involve acquisition, financing, management, disposition, brokerage, and other costs. Investors should understand the fee structure of the specific offering.
Limited Investor Control
Beneficial owners generally do not have the same ability to make property-level decisions that they would have with directly owned real estate.
Investment Risk
Property values, income, occupancy, financing conditions, market demand, and other factors can change. Investment results are not guaranteed.
Who Can Invest in a Delaware Statutory Trust?
Investor eligibility depends on the specific DST offering and how it is structured.
Many DST opportunities used within the 1031 exchange market are offered through private securities offerings that may be limited to accredited investors.
Under current SEC rules, an individual can qualify as an accredited investor through certain financial or professional criteria, including specified income, net worth, or qualifying securities-license standards.
Accredited investor status does not determine whether a particular DST is suitable for an individual investor. Eligibility is only one part of the evaluation.
Is a DST Right for Every Real Estate Investor?
No. A DST may appeal to an investor who wants professionally managed real estate or is considering a different approach after years of directly owning property.
Another investor may prefer the control, flexibility, liquidity profile, or economics associated with owning property directly.
The decision depends on factors such as:
- Investment objectives
- Risk tolerance
- Income needs
- Time horizon
- Liquidity needs
- Management preferences
- Existing real estate exposure
- Overall financial circumstances
The purpose of evaluating a DST is not to assume it is the right solution. It is to understand how it works, compare it with the alternatives, and determine whether a specific opportunity warrants further consideration.
Evaluating a DST Opportunity
Not all DST investments are the same.
The underlying property, sponsor, tenants, market, financing, lease structure, projected distributions, fees, investment assumptions, and exit strategy can differ significantly between offerings.
Investors should evaluate the actual investment rather than making a decision based solely on the fact that it is structured as a DST.
Customized 1031 helps investors review DST opportunities within the broader context of their real estate and 1031 exchange objectives.
Have Questions About Delaware Statutory Trusts?
DSTs combine elements of real estate ownership, private investment offerings, and, in some cases, 1031 exchange planning.
Our DST FAQ addresses common questions about ownership, 1031 eligibility, investment requirements, income, financing, liquidity, management, and other considerations.
Learn Whether a DST Belongs in Your Real Estate Strategy
A Delaware Statutory Trust can provide a different way to participate in investment real estate, but the structure and the specific investment need to be understood before making a decision.
If you are selling investment property, considering a 1031 exchange, or exploring professionally managed real estate, Doug Zator can help you better understand DST opportunities and how they compare with other potential strategies.