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The Popularity of Delaware Statutory Trusts

June 8, 2018

Savvy investors are always looking for promising new investment opportunities. One of the key abilities of most successful investors is the ability to detect trends before they become trends.  In other words, to pick up on promising opportunities before they becomes clear to the majority of investors. When you stop and think about it, this makes intuitive sense.  That’s because once a promising opportunity becomes obvious to many, there’s an excellent chance that it’s level of promise has been significantly diluted. If you want the best possible return on investment, you need to invest early,  Yes, this will often involve more risk.  Often, however, some risk is necessary in order to have a large return.  Delaware statutory trusts are one such opportunity.

Diversification is Important

In addition to this ability to recognize trends, one other staple of successful investing is diversification. That’s true no matter how risk-free or promising a given investment opportunity may be.  It’s almost always preferable to see that your investment funds are distributed across multiple opportunities. Diversifying your investment funds over multiple avenues will decrease your overall risk.  It also increase your odds of achieving financial success. The logic is simple.  Picking three or four investments, rather than one, triples or quadruples your opportunities for success.  

One real estate investment opportunity rapidly gaining traction is the Delaware statutory trust, or DST. As we will see, a DST allows investors to gain interests in real estate ordinarily be unavailable or at least difficult to obtain. DSTs offer many advantages to investors.  Investors are now responding accordingly. In this post, we will discuss the structure of Delaware statutory trusts.  We’ll also look at the unique benefits they offer.  Lastly, we’ll look at how these entities fit in the context of a 1031 exchange. 

Basic Structure of Delaware Statutory Trusts 

Delaware statutory trusts are entities which allow multiple investors to co-own a common piece of investment real property. DSTs can accommodate a large number of investors.  Currently up to 99 investors may own a piece of a DST. By contrast, in a tenancy-in-common ownership arrangement, no more than 35 individuals may co-own a common piece of real property. This higher limit allows DSTs to obtain extremely expensive properties.  Such properties would otherwise be outside the reach of most investors. For instance, it’s common for a large commercial property, say a large department store, to have a DST ownership arrangement.  That’s because such developments typically cost tens of millions, sometimes hundreds of millions, of dollars to construct.  

Most Delaware statutory trusts have a minimum investment. Usually, this minimum is $100,000 or a figure close to that amount. When an investor purchases a DST interest, he or she acquires a “undivided fractional interest” in the underlying property.  This means that the investor may sell the interest freely without prior approval or cooperation from the other DST co-owners. In this sense, an interest in a DST is very akin to a tenancy-in-common interest.  

Advantages of DSTs 

There are a number of reasons why DSTs have increased in popularity among real estate investors in recent years. One reason relates to the fact that DSTs are managed by independent professionals.  As a consequence, investors aren’t burdened with the responsibility of actively keeping up with their investment. In some cases, this management responsibility can be quite significant.  Depending on the type of the investment, it may even be daunting.  Accordingly, in many cases investors are relieved of a substantial amount of work.  

Another advantage of Delaware statutory trusts is increased diversification.  Specifically, these entities allow investors to diversify their investment portfolios in ways ordinarily unattainable. Because of their structure, DSTs also enable investors to acquire interests in properties otherwise outside their financial reach. It’s possible to find DSTs for a wide assortment of properties.  For example, multifamily rental complexes, large commercial properties, etc.  This allows investors to build portfolios with greater diversification than is otherwise attainable. 

A Well Diversified Portfolio

In short, DSTs permit investors to acquire a well-diversified real estate portfolio involving more elusive properties.  DSTs also allow investors to receive steady returns with minimal managerial responsibilities. Financing is also easier to obtain for DSTs.  That’s because lenders view these entities as a single unit rather than a group of isolated investors. 

DSTs in the Context of the Sec. 1031 Exchange

Another benefit of DSTs is that an interest in a DST is considered an interest in real property for the purposes of Section 1031.   We’ve covered Section 1031 extensively in prior articles.   This is expected, because tenancy-in-common interests (or TIC interests) are considered real property in a 1031 exchange.  Accordingly, it’s not surprising that DST interests would also be regarded as real property.  That’s because there are close similarities between these two forms of ownership. More and more often, investors are using DSTs as replacement property in 1031 exchanges.  So much so that, in fact, many companies have recently sprung up to assist the process.  These companies specialize in assisting investors locate and procure suitable DST properties for the purpose of completing a Section 1031 tax-deferred exchange. 

Our New York City Tax Attorneys Can Assist

If you’re considering an interest in a Delaware statutory trust, particularly in the context of a 1031 exchange, don’t hesitate to reach out to us.  A top New York City tax attorney will take a look at your proposed transaction. Here at Mackay, Caswell & Callahan, P.C., we’ve counseled lots of investors through the 1031 exchange process.  We work hard to stay current with important developments in the world of tax, business and finance. DSTs are here to stay.  In fact, they’re becoming more and more prevalent.  Serious real estate investors should therefore give serious thought to utilizing these entities. They can give a serious boost to a portfolio. 

Image credit: Images Money 

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