Investing in DSTs – What you Need to Know

About This Webinar

Archer Investors Managing Partner, Beth Veloz, provides a general overview of Delaware Statutory Trusts (DSTs) and their potential role in Section 1031 exchange planning.

I. Understanding DSTs.

• Definition: A DST is a trust structure that allows investors to hold passive, fractional ownership in institutional-quality real estate.

• Process: A sponsor (a financial institution) vets and acquires property, manages it during the investment period, and eventually sells the asset. Investors rely entirely on the sponsor's expertise to manage the investment.

• Investor Profile: This structure is restricted to accredited investors (meeting specific income or net worth requirements) seeking to transition from active property management to a passive investment position.

II. Key Features and IRS Guardrails. The IRS established strict guidelines in 2004 (Revenue Ruling 2004-86) for DSTs to qualify for 1031 exchanges, which protect the structure's tax status but significantly limit flexibility:

• No Capital Calls: Sponsors are prohibited from asking investors for additional capital. If a property requires unforeseen funds, the investment may be at risk.

• Fixed Financing: Financing on a property cannot be changed, refinanced, or added mid-investment.

• No Reinvestment of Proceeds: When the underlying asset is sold, proceeds must be returned to the investors; the sponsor cannot automatically reinvest them on the investors' behalf.

• Illiquidity and Lack of Control: DSTs are highly illiquid, long-term investments. Beneficial owners have no control over day-to-day management, operations, or the timing of the property sale.

III. Strategic Considerations.

• Time Management: DSTs allow investors to step back from the labor-intensive requirements of direct property management.

• Diversification: Investors can potentially allocate funds across different asset classes and markets. However, diversification does not guarantee profits or protect against market losses.

• Tax Deferral Potential: DSTs can qualify for 1031 exchange benefits, potentially helping investors defer capital gains taxes. Strict adherence to IRS timelines (45 days to identify, 180 days to close) is required, and failure to comply will result in an immediate taxable event.

IV. Key Risk Factors.

• Real Estate & Market Risks: Investments are subject to market cycles, fluctuating interest rates, vacancies, tenant defaults, and declining property values. Investors may experience a total loss of principal.

• No Guarantee of Returns: Distributions are derived from rental income and are never guaranteed. They may be reduced or suspended entirely based on property performance.

• Fees and Expenses: DST offerings typically involve significant up-front fees, ongoing sponsor fees, and operating expenses that can negatively impact overall returns.