If you’ve been exploring commercial real estate opportunities or looking for a passive real estate investment, you’ve likely come across the term “DST.” This acronym stands for Delaware Statutory Trust, which is a legal entity created under Delaware state law.
While a DST can be used for diversification in a wide range of portfolios, its structure of makes it popular among investors seeking a replacement property for their 1031 like-kind exchange. Although DSTs are not incredibly complex, it’s important to have a solid understanding of how they work before making a purchase. This guide will provide a quick overview of the basic information you need to know.
What is a Delaware Statutory Trust?
A DST is a real estate structure that allows a pool of investors to hold a beneficial interest in investment real estate properties held within a trust. This limited-purpose entity offers investors access to one or more professionally managed investment real estate properties.
Most DST real estate is comprised of institutional-grade commercial properties with income potential. Since the purchase price of these properties often falls between $25 million and $125 million, a DST gives investors the ability to acquire assets that, for most, would otherwise be unattainable.
How Does a DST Work?
A DST is set up by a “sponsor,” who is responsible for establishing the trust, identifying potential properties, carefully vetting them, and providing the funds to acquire them.
Once all the properties have been purchased, the sponsor puts them into an “offering,” which is made available to accredited investors. While the trust retains ownership of the assets, investors purchase “beneficial interests,” which represent a percentage of the underlying assets.
The DST trustee makes all decisions regarding the purchase and sale of the properties and is also responsible for financing for the property purchases, collecting investment money, and hiring a property management company to maintain the properties.
DST Income and Liquidation
As a DST earns income, it’s passed on to the investors, often on a monthly basis.1 The potential for passive income is one of the things that makes this investment vehicle so appealing to investors. Much like an LLC, all dividends and income are passed through and taxed on an individual level, rather than on a group level.
Most DST real estate properties are held for three to 10 years. Once a property inside a DST is sold, investors will receive all sales proceeds, including any gains from appreciation. If the property was used for a 1031 exchange, the owner can now use the funds to purchase a new replacement property, continuing to enjoy capital gains tax deferral.
Who Can Invest in a DST?
While the concept of a DST may appeal to a wide variety of individuals, these investments are only available to accredited investors. According to the Securities and Exchange Commission (SEC), an accredited investor must have either:1. A net worth of $1 million or more (excluding your primary residence) individually or jointly with their spouse or
2. An average annual income of greater than $200,000 for the last two years ($300,000 for couples filing jointly) with the expectation of earning the same or higher income in the current year.
In addition to being accredited, an investor would also need to meet the DST’s minimum investment requirements. While this varies from one DST to the next, many require an investment of at least $100,000.
Learn More About DST 1031 Exchanges
1Potential cash flow, returns and appreciation are not guaranteed.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results.
IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities.
Investment advisory services offered through Bangerter Financial Services, Inc. A state Registered Investment Advisor. Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Bangerter Financial Services, Inc. is independent of CIS.