Delaware Statutory Trusts (DSTs) as alternative investments provide possible advantages for real estate investors but there are a couple of things to consider as you invest your thousands of dollars into this complex investment vehicle. Some of these include, the eligibility of investors, tax treatments, investment objectives amongst others. 

Investors looking to invest or already Investing in DSTs require adequate information so in order to make the right decisions. Let’s get into the details of important aspects of investing in DSTs that every investor should know and consider.

Accredited Investor

The United States federal securities laws allows only individuals considered as accredited investors to participate in certain Investments. A Delaware Statutory Trust is of such investment platforms that are exclusive for investors that meet the requirements set by the Security Exchange Commissions (SEC). One of the reasons these requirements were put in place was to provide indirect protection to average investors against losses from alternative investments not listed in the public market. 

The most recent amendments to the accredited investor criteria was in 2020. This amendment included individuals with defined measures of sufficient experience and professional knowledge or possess certain recognized qualifications and certifications. Prior to this amendment, accredited investors were identified based on their annual income, net worth and asset value. The SEC considers it important that alternative investments — which are complex in nature and deemed more risky than traditional investments — are only accessible to sophisticated investors who possess the required knowledge and financial acumen of such investments.

What are the financial requirements for accredited investors? This depends on if you are an individual, couple or an entity.

Individuals: Persons with income exceeding $200,000 for two most recent years and expected to at least remain in this income band for the current year; also, individuals with single or joint net worth (for couples) exceeding $1,000,000 (excluding primary residence) can be classified as accredited investors.

Couples: To be classified as accredited investors, couples with joint income are required to have income exceeding $300,000 for two most recent years and expected to at least remain in this income band for the current year.

Entities: Specific organizations or entities owned by accredited investors can be allowed to invest in sophisticated financial assets and instruments. Such entities need to have total assets in excess of $5,000,000. Such organizations may include but are not limited to banks or any savings and loan association, a registered broker or dealer, an insurance or investment company or a business development company. 

If you are considering investing in a DST, you have to meet the criteria set by the SEC and also maintain this classification. Qualification as an accredited investor allows you to purchase ownership interest in a Delaware Statutory Trust directly or by depositing your 1031 exchange proceeds into this investment vehicle.

Risk Appetite

Delaware Statutory trusts are commonly known for the advantage of qualifying as 1031 exchanges. DSTs provide an opportunity for investors to explore potential passive real estate investment benefits and possible tax deferral advantages. However, they do not come without risks. Some of the risks associated with DST investments include illiquidity of property investments, minimal or no control on property investment decisions amongst others. Furthermore, like any other type of investment, Delaware Statutory Trusts do not provide guaranteed returns. 

Due to inherent risks associated with investment vehicles like DSTs that are not publicly listed and not required to provide disclosures, you need to consider your risk appetite. These types of investments are thought to be risky even though they do not directly fluctuate with movements in the financial markets. Such alternative investments may not be suitable for risk averse investors or investors who have much to lose. This is why they are made accessible to investors that are considered to be well aware of associated risks, have surplus funds and a robust net worth. 

Portfolio composition

For accredited investors looking to diversify their investment portfolio and add a different asset in their portfolio mix, the DST can be considered as an option. While portfolio diversification does not provide a hundred percent protection from investment losses, it is considered  an effective strategy for risk management. 

Through investments in Delaware Statutory Trusts, you can have access to a wide range of property investments such as commercial real estate, retail and residential buildings and also industrial buildings. 

It is important to note that DSTs are complex alternative investments and including them into your investment portfolio may require not only the professional services of your financial advisor, but also experts such as accountants and tax advisers.

Investment objective

Given the nature of DSTs, if you want to include them in your portfolio, you would want to ensure that they fit into your overall investment goals. Investing in real estate through a Delaware Statutory Trust is generally more suitable for long term investing strategies. An ownership interest in a DST can not be quickly sold off as you would a publicly listed stock in the financial market. There is no publicly traded market for Delaware Statutory Trusts and therefore it may take a long time to find avenues to dispose of investments. 

Most investments in DSTs are held for an average period of five to ten years. They usually provide a means for investors to keep deferring taxes on investments for a relatively long period of time. If your investment objective is to hold long term assets with the potential benefit of tax deferral, then DSTs are considered a plausible option.

Regulations and Tax laws for DSTs

Delaware statutory trusts are normally set up as pass-through entities, as regards tax treatment, this indicates that the return on investments are taxed in the hands of the investors. For federal tax purposes, the classification of a DST as a business or a trust is dependent on the power awarded to trustees to carry out activities such as acquiring and disposing of property, making structural modifications to the property, renegotiating leases or debt, investing cash for profit or collecting and distributing income.

The notable tax regulation governing investments in DSTs is that which makes this investment platform eligible for 1031 exchanges. This compelling feature enables accredited investors to defer taxes on capital gains from real estate property sales. The 1031 exchange through DSTs provides an avenue for investors to reinvest their capital gains from sale of existing property into like kind properties that qualify for tax deferral. Real estate investors are able to purchase ownership interests in institutional quality properties for a fraction of the cost as investors funds are pooled in the DST. 

In terms of legal structure, DSTs operate as limited liability structures offering protection to associated beneficial owners, trustees, managers. The liability protections for beneficial owners  are similar to stockholders of a private corporation, investors or trustees cannot be held liable to third parties for operations of the DST. As such, creditors are not able to seek remedies on investments in DST properties.

Final Thoughts on Investing in DSTs

Ensure that you understand the sophisticated aspects of Delaware Statutory Trust investments. They are definitely not risk proof, neither do they guarantee returns on investments. If DSTs fit into your overall investment strategy as an accredited investor, then you can utilize them as part of your investment portfolio. However, it is recommended to always evaluate your portfolio mix and rebalance your assets if needed, real estate investments inclusive.

Got questions on investing in DSTs, you can contact the Stax Capital team for robust information on investment options and strategies.