Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a unique real estate investment vehicle that allows a group of individual investors to purchase fractional interests in large commercial real estate assets. These assets are typically beyond the financial reach of solo investors. Here’s how DSTs work and why they are relevant for real estate investors:

Formation and Sponsors:

• DSTs are created under Delaware trust law.
• Real estate companies (sponsors) form DSTs by identifying and acquiring assets using their own capital.
• The sponsor then opens an offering period, and individual investors purchase fractional shares of the DST.
• DST beneficiaries are passive investors, providing equity capital.

 DST History:

•  DSTs were established in 1988 with the passing of the Delaware Business Trust Act (later renamed the Delaware Statutory Trust Act in 2002).

Ownership Structure:

• DST investors, also known as beneficiaries, do not directly own physical real estate. Instead, they own shares of a trust specifically formed to be the legal owner of the underlying properties held within the trust.
• The legal separation between the trust and the pool of DST investors is crucial.

Yes, the IRS has approved Delaware Statutory Trust (DST) investments as like-kind property for 1031 exchanges. This approval allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of appreciated real estate into DSTs. The key consideration is that the IRS treats each investor’s beneficial interests in a DST as direct property ownership, making it eligible for 1031 exchanges both when acquiring and selling the DST. However, it is critical to understand that if the DST sponsor fails to comply with IRS guidelines and requirements outlined in Revenue Ruling 2004-86 issued in 2004, the IRS may disqualify exchanges made in deficient structures. It is important to conduct diligence on each sponsor, their structure, review tax opinions related to each DST offering and talk with your tax and legal advisors prior to investing.

Filing taxes for Delaware Statutory Trust (DST) investments involves several considerations. Let’s break down the key aspects:

Beneficial Interest Ownership:

• DST investors acquire a fractional interest in the trust, making them “beneficial interest owners.”
• The IRS treats DSTs as “grantor trusts” disregarded for tax purposes.
• Beneficial owners report their share of income, expenses, and other tax-related items.

Income & Expenses Reporting:

• Instead of receiving Schedule K-1s or Form 1099s, DSTs issue grantor trust letters to beneficial owners.
• These letters detail the investor’s share of rental income, expenses, and other financial information.
• Beneficial owners report this information on IRS Schedule E or Form 1040, similar to reporting income from a single ownership rental property.

Phantom Income:

• Sometimes, a DST’s taxable rental income exceeds the actual distributions received due to “phantom income.”
• Phantom income can occur from rents received in advance or other factors.
• Investors should be aware of this when reporting income.

1031 Exchanges:

• DSTs qualify as like-kind replacement property for Section 1031 exchanges.
• Investors can defer capital gains taxes by reinvesting proceeds from the sale of real estate into DSTs.

Location and Tax Liability:

• Properties held in a DST can be located anywhere in the U.S., and investors do not incur tax liability in Delaware (unless the investor or the DST property is in Delaware)

Remember that consulting with a qualified CPA or tax professional is essential to navigate DST tax obligations effectively.

In the Delaware Statutory Trust (DST) investment landscape, a broker-dealer plays a crucial role in marketing and selling DST offerings to investors. Let’s delve into the specifics:

DST Broker-Dealer:

• A DST broker-dealer is a securities company that specializes in selling investments related to DSTs.
• These broker-dealers collaborate with DST sponsors to market and distribute DST offerings to potential investors.
• To operate legally, the Securities and Exchange Commission (SEC) must license DST broker-dealers.

Due Diligence and Analysis:

• One of the primary functions of a broker-dealer is to analyze and perform due diligence on DST sponsor companies and their specific DST 1031 offerings.
• They assess the financial viability, structure, and overall quality of the DST investment opportunities.
• Some broker-dealers have in-house due diligence teams, while others may outsource this work to third-party providers.

Registered Representatives:

• Broker-dealers typically have a group of registered representatives who hold securities licenses with the broker-dealer.
• These representatives act as intermediaries between the broker-dealer and individual investors.
• They provide information, answer questions, and facilitate the investment process for clients interested in DSTs.

In summary, DST broker-dealers bridge the gap between DST sponsors and investors, ensuring that potential investors receive accurate information and have access to DST investment opportunities. Their due diligence helps investors make informed decisions about participating in DST offerings.

When evaluating potential parties for Delaware Statutory Trust (DST) investments, ensuring their reputation and trustworthiness is crucial. Here are some essential steps to help you identify reputable DST sponsors and advisors:

Research the DST Sponsor:

• DST sponsors are responsible for setting up the trust that holds real estate assets.
• Investigate the sponsor’s history, track record, and experience in managing DSTs.
• Look for sponsors with a successful track record of underwriting, financing, property acquisition, and ongoing management.

Check for Transparency:

• Transparency is key. Ensure that the sponsor provides detailed information about the investment property, including financial performance, management team, and exit strategy².
• Ask about any affiliations between the DST advisor and sponsor. Some advisors may be sponsor-affiliated, which could impact their recommendations³.
• If the relationship between the DST advisor and sponsor lacks transparency, inquire further to understand the connection.

Avoid Conflicts of Interest:

• Be cautious of sponsor-affiliated advisors who may prioritize specific deals or offerings from a single sponsor.
• Independent advisors (not affiliated with a specific sponsor) may provide more objective advice.
• Ask whether the advisor offers deals from multiple sponsors or just one. Ensure they act in your best interest³.

Due Diligence on Advisors:

• Evaluate advisors beyond licensure. Consider their expertise, risk assessment, and understanding of your investment goals.
• Reputable advisors are transparent about their commissions and fees.
• Use resources like FINRA’s BrokerCheck to verify where DST sponsors and advisors are registered

References and Background Checks:

• Check references and verify employment history for both sponsors and advisors.
• Conduct background checks to ensure credibility and reliability

Remember that due diligence is essential when choosing reputable parties for DST investments. Seek professional advice and thoroughly assess the sponsor’s and advisor’s qualifications before making investment decisions.

Assessing the quality of a Delaware Statutory Trust (DST) investment involves thorough analysis and consideration of several factors. Here are key steps to help you evaluate DST opportunities:

Property Quality and Location:

• Examine the underlying real estate property held by the DST. Consider factors such as location, property type (e.g., office, retail, multifamily), and market demand.
• A well-located property in a strong market with stable or growing rental income is generally preferable.

Sponsor Reputation and Track Record:

• Research the DST sponsor’s history and experience. Look for sponsors with a successful track record in managing DSTs.
• Consider their ability to acquire, manage, and exit properties effectively.

Financial Performance:

• Review financial statements, including income and expense reports provided by the sponsor.
• Assess the property’s historical performance, projected cash flow, and potential for appreciation.
• Evaluate the stability of rental income and any potential risks (e.g., lease expirations, market fluctuations).

Tenant Quality and Leases:

• Understand the tenant mix. Are there creditworthy tenants with long-term leases?
• Evaluate lease terms, rent escalations, and tenant stability.
• Vacancy rates and tenant turnover can impact cash flow.

Exit Strategy:

• Consider the sponsor’s exit plan. How will the property be sold?
• Understand the timeline for potential liquidity events.
• DSTs typically have a finite holding period (often 7 to 10 years).

Tax Implications:

• Consult with a tax advisor to understand the tax benefits and implications of DST investments.
• DSTs are commonly used for 1031 exchanges, allowing investors to defer capital gains taxes.

Risk Tolerance and Investment Goals:

• Assess your own risk tolerance and investment objectives.
• DSTs are generally considered passive investments, so be prepared for limited control over property management decisions.

Due Diligence and Professional Advice:

• Conduct thorough due diligence. Read offering documents, legal agreements, and sponsor materials.
• Seek advice from professionals, including real estate attorneys, CPAs, and financial advisors.

Remember that each investor’s situation is unique, and what constitutes a quality DST investment may vary based on individual goals and preferences. Always make informed decisions and seek professional guidance.

The monthly cash flow from Delaware Statutory Trust (DST) investments is not guaranteed. Here’s why:

Passive Investment Structure:

• DSTs are typically structured as passive investments.
• Investors contribute capital to the DST but do not actively manage the property.
• Cash flow depends on the performance of the underlying real estate asset.

Rental Income Variability:

• DSTs primarily generate cash flow from rental income (e.g., from commercial properties, apartment complexes, etc.).
• Rental income can fluctuate due to factors such as vacancies, lease renewals, and market conditions.
• If tenants vacate or lease rates decrease, it directly impacts the cash flow.

Property-Specific Risks:

• Each DST property has its own unique risks.
• Factors like location, tenant quality, property management, and market trends affect cash flow.
• Unexpected expenses (e.g., repairs, maintenance) can reduce available cash flow.

Market Conditions and Economic Cycles:

• Economic cycles impact real estate markets.
• During economic downturns, rental demand may decrease, affecting cash flow.
• Conversely, strong market conditions can lead to stable or increasing cash flow.

Loan Payments and Debt Service:

• DSTs often use financing (mortgages) to acquire properties.
• Loan payments (debt service) reduce available cash flow.
• Investors receive their share of cash flow after deducting debt payments.

Distribution Timing:

• DSTs distribute cash flow periodically (e.g., monthly or quarterly).
• The timing and amount of distributions depend on property performance and lease terms.

Risk Disclosure:

• DST offering documents provide detailed risk disclosures.
• Investors should carefully review these documents before investing.

In summary, while DSTs offer tax benefits and passive ownership, cash flow is subject to various factors. It is essential to assess each DST opportunity thoroughly and understand the associated risks. Consult with financial professionals to make informed investment decisions. 

Broker Check is a valuable tool provided by the Financial Industry Regulatory Authority (FINRA) that allows investors to research the professional backgrounds of investment professionals, brokerage firms, and investment adviser firms. Here is why it is crucial to use BrokerCheck:

Transparency and Informed Decisions:

• BrokerCheck provides transparency by offering detailed information about financial professionals.
• Before making any investment decisions, it is essential to review this information to ensure you are working with a reputable and trustworthy professional.

Investment Professional Histories:

• By using BrokerCheck, you can find an investment professional’s history.
• It includes details such as employment history, qualifications, industry exams passed, and any customer disputes or disciplinary events on their record.

Barred Brokers:

• BrokerCheck helps you determine if any brokers have been barred by FINRA.
• If a broker has regulatory actions or has been involved in fraudulent activities (such as a Ponzi scheme), this information will be available in their BrokerCheck report).

In summary, BrokerCheck empowers investors to make informed decisions by providing insights into the backgrounds and qualifications of financial professionals. It is a crucial step in vetting potential advisors and safeguarding your investments.

1. Initial Fees: These cover the setup and administrative costs of the DST. They may include legal fees, due diligence expenses, and other upfront charges.
2. Closing Costs: Similar to traditional real estate transactions, DSTs involve closing costs. These include escrow fees, title charges, and other expenses related to finalizing the investment.
3. Property Management Fees: DSTs typically hire professional property management companies to handle day-to-day operations. Investors pay fees for these services, which cover tasks like tenant management, maintenance, and repairs.
4. Sales Commissions: When you invest in a DST, the sponsor or broker may charge a sales commission. This fee compensates them for facilitating the investment.
5. Other Expenses: Depending on the specific DST, there may be additional costs, such as appraisals, environmental reports, and property condition assessments