Much has been written about the Delaware Statutory Trust as a 1031 Exchange. And for our readers who are attorneys and CPA’s, yes please note 2004-86 IRS Revenue ruling. Now let me direct you to an article posted by one of the largest 1031 escrow companies in the country about DSTs. Why? Because there’s a lot I can say about DSTs and will (as well as others) as the book continues, but I wanted you to hear from a completely independent source. IPX Investment Property 1031 Exchange Services, Inc: A Subsidiary of Fidelity National Financial, a Fortune 500 Company. IPX wrote a detailed blog on their web site, “DSTs, an option to keep on your 1031 radar.” This struck me as quite significant, as typically IPX doesn’t often wander this close to endorsing any particular strategy from a specific industry. Considering all the research that a large institution puts into their content, I thought the endorsement signaled that DSTs had moved from what was a cottage industry to a multi-billion-dollar industry.
Let me share some of what was posted:
“DSTs offer an intriguing option for investors who are looking for properties to complete their 1031 Exchanges.
A DST (Delaware Statutory Trust) is an “arm chair investment”, or a passive investment opportunity that allows individuals to own fractional shares in institutional grade properties. A DST is a legal entity created as a trust under Delaware law that can hold real estate. In the context of real estate, DSTs are formed pursuant to private governing agreements under which a property or several properties are held, managed, administered, and/or operated for profit by a trustee for the benefit of the holders of the DSTs beneficial interests. Some examples of properties that were recently structured as DSTs are:
1. A portfolio of 17 storage properties in three states
2. An office building in Manhattan
3. A multi-family portfolio in Colorado
4. A large retail shopping center in California
5. A portfolio of CVS and Walgreens stores located in Southern states
How does a DST work? A trustee of the DST initially purchases the property and takes title. The Sponsor of the DST, the party who typically arranges the bank financing and coordinates the management of the property, then structures the transaction and arranges for sale of beneficial interests to individual investors. Though the beneficial interests are considered to be securities under federal securities laws, for purposes of 1031 Exchanges, Revenue Ruling 2004-86 states that a beneficial interest in a DST is considered “like-kind” real estate.
According to DST proponents, these are some of the benefits of DST ownership:
1. DSTs can offer higher quality, investment grade assets that are typically only available to large institutions
2. DSTs provide investors with current income
3. DST investors have no management or day-to-day operation responsibilities
4. The debt is non-recourse, which means that in the event of a default, the DST investor is not personally liable
Of course, DSTs are not suited for all. Investors who enjoy managing the day-to-day operations of their properties may not be good candidates. A DST is also not for an investor who wishes to invest in property for a short period since DST investments are typically designed for a holding period of an average of five to seven years. Additionally, DSTs are designed for “accredited investors” which are high net worth individuals as defined in Regulation D of the Securities Act of 1933.
Given the intricacies of purchasing suitable real estate assets and structuring these offerings, from both a securities and tax perspective, exchangers and their advisors should perform due diligence when selecting a DST Sponsor. The Sponsor will provide a Private Placement
Memorandum (“PPM”) which provides information about the properties, area demographics, leases, projections and other important disclosures. Due diligence emphasis should be placed on real estate, property management and asset management expertise, prior performance track record, experience with sophisticated financing structures, transparent investor communications, financial strength of the Sponsor and excellent legal representation.”
DSTs have risks like all real estate and carry fees and expenses which may offset some of the benefits of tax deferral.
Ok, so there you have a good look at what some serious independent research is stating and a pretty respectable disclosure also. I will tell you 80% of what I am seeing are multi-family residential DSTs 300 to 400 units. And if you get the chance you will likely be impressed at the high level of management and software sophistication used to keep these properties operational. Their algorithms measure and track every bit of data both on site and off on a daily basis. And while we’re at it, investors receive quarterly management and budget reports. It is a very transparent process.
Having worked with investment property owners for years, I have seen many transformations from active manager to passive investor. I have heard all the wonderful stories and new pursuits that come with freeing up more time and letting go of, at least for a few, some serious stress. At some point owning investment properties can start to deplete your energy, or at the very least, interfere with fully immersing into retirement mode. For others, listing and selling properties and executing a 1031 Exchange into a DST investment grade property is simply a matter of taking advantage of a greatly appreciated property. Putting all that equity to work along with diversifying geographically and by asset class, often also potentially increases monthly income.
*** DST investments are illiquid, highly speculative and like all real estate, may involve substantial risks. DST owners do not maintain control over management decisions and are subject to additional IRS regulations. Potential tax benefits must be weighed against the costs and fees associated with a DST investment and its management.
By Don Meredith, President of Tactical Income Inc.
Author of The DST Revolution –1031 Exchange into retirement mode. 2nd Edition
Contact Don Meredith of Tactical Income, to learn more about Delaware Statutory Trusts (DSTs) and 1031 Exchanges at: don@lightpathcapital.com or (619) 726-6100.
Securities through LightPath Capital, Inc., Member FINRA/SiPC, 1560 E. Southlake Blvd., Suite 100 Southlake, TX 76092 925-899-1709 Direct 214-734-2957 Office