What is a DST ?

Delaware statutory Trust abbreviated as DST is a legal trust which is a separate legal entity under Delaware statutory law, which allows a flexible approach to the operation and design of the entity. The minimum investment for a DST Property is $100,000 permitting an investor to diversify his or her exchange proceeds among multiple properties. The investment made via Delaware statutory trust (DST) qualifies the need for “Like-Kind Property” under the 1031 Exchange.

Delaware statutory trust (DST) Information Guide:

A Delaware Statutory Trust (DST) allows investors to co-invest with other 1031 exchange investors in one or numerous institutional-grade properties. When an investment is made in a DST, investors are assigned fractional ownership of equity and debt, fulfilling the exchange requirements. Investors will receive ordinary income in the form of 1099, 1098 allows mortgage interest write-off, an operating statement or a profit & loss statement for depreciation. With a DST, investors can still enjoy the benefits of owning real estate without dealing with the day-to-day responsibilities of actively managing real estate.

What is the origin of DST?

It is the IRS Revenue Ruling 2004-86 which made way for DST to be registered as an ideal form of 1031 tax-deferred Exchange. According to the IRS Revenue Ruling 2004-86, the beneficial interest obtained from DST owned real estate is considered as the “direct interest in the real estate.” This consideration further qualifies for a 1031 Exchange with an assumption that all the other necessary criteria are met.

The use of DST has widely increased from the year 2000 in many formats such as:

  • Mezzanine Financing
  • Tax Deferral
  • Protection of Assets
  • Balance Sheet securitization

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Why should one choose DST form of 1031 Exchange?

As per the latest statistics, 80% of the securitized real estate dealings under 1031 exchange are made via DST 1031 Exchange format. DST is different from a TIC program. In the TIC program, there can be a maximum of 35 number of individual borrowers whose individual needs are approved by the lender. In DST, one borrower gets one loan only from the lender. DST is the best form of 1031 exchange as professionals exclusively manage it, and the investor receives a regular flow of income.

What are the key advantages of DST?

DST offers many advantages, some of the key features are listed below:

  • No need to keep a keen eye on the regular management: The process of maintenance, leasing, rent collection, as well as the mortgage, is managed by the trusted professionals. You are under no stress of taking care of your property every day. You can make out time for other essential activities.
  • Monthly cash flow expansion: Your DST investment provides you with a monthly income check based on the net-flow your ownership has generated for you. The cash flow received by the investors annually ranges from 5 percent to 7 percent. The values of annual projected returns tend to change from 14% to 18% when there is a fall in the principal payment of the loan and capital appreciation.
  • Property kept in safe hands: Properties owned and managed by DST are controlled by real estate companies of state with an impressive audited track record and years of experience in the respective types, sectors and property locations.
  • No need to run here and there: The experienced and qualified Real Estate Company will locate an ideal property for you. The company will make all the arrangements for financing, property acquired and set up the DST program with due diligence and commitment.
  • Bigger and better investments: The investors can purchase higher quality properties which are more prominent in size. These properties tend to attract tenants with better stability and financial strength.
  • Asset Diversification: You can divide your substantial net proceeds into different properties which, further invested into different assets in different markets.
  • Minimum investment: According to the DST structure, multiple owners can make various investments. The minimum cash investments for DST are $25,000, and minimum stakes for the 1031 exchange are $100,000.
What are the requirements of lenders under DST?
  • Bankruptcy Proof to keep property out of the hands of bankruptcy creditors
  • Well-structured DST
  • Foreclose assurance on the first mortgage
  • No hefty qualification requirement
  • No need for constant monitoring
Advantages for the lender:

The master tenant is the addition of one layer of bankruptcy protection which is advantageous for the lender. It is also structured as a Special Purpose Entity. The sponsors own and control the functioning of the master tenant. The net worth requirement and liquidity also lie in the hands of the sponsor to meet the requirements of the lender.

What is the role of “The Master Tenant” under DST?

A Master Tenant is an affiliate which is controlled by the sponsor. In the case of master release, the authority to lease the property to either residential or commercial lies in the hands of the Master Tenant. The repair, maintenance, and communication with the operation agent (an affiliate of the sponsor) are all managed by the master tenant.

In familiar man terms- The master tenant is the substitute owner of the property with the full-fledged authority. This arrangement ends the law requirements and serves as a lucrative option to the institutional lenders. It also rules out unanimous consent of the TIC towards the management actions raised under TICs.

What are the risks associated with DST?

The DST investments are not entirely risk-proof; here are a few risks factors listed:

  • Investors have to rely on the continued competency and program sponsor’s success
  • Insolvency of the sponsor
  • Investors have to rely on complete discretion of the third party
  • Inability to refinance the program if the property is held under leverage
  • Interest related conflicts with people associated with the property
“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”