As a real estate investor, there are many pros and cons to consider when investing in Delaware Statutory Trusts (DSTs). The advantages of DSTs include access to larger assets, tax benefits, and lower risk. They are often great passive investment options, too.
But DSTs are not for everyone. DSTs often come with long hold periods, no individual control, and investment fees. It is also rare to have early exit opportunities until the full DST lifecycle is complete.
Here is a detailed breakdown of the benefits and disadvantages to consider:
Pros of Investing in a Delaware Statutory Trust (DST)
1. Fractional Ownership of Commercial Real Estate
Delaware Statutory Trusts (DSTs) are a form of fractional ownership. This allows many parties to share in a high-value asset that may be otherwise out of reach.
This method allows investors to access bigger, more expensive properties than they would be able to on their own. The ability to invest in large properties means you could lessen risk through portfolio diversification while enjoying the benefits of larger assets.
2. Tax Benefits
Depending on your circumstances, DSTs offer certain tax benefits for real estate investing. Delaware Statutory Trusts qualify as like-kind property under IRC section 1031 of the Federal Tax code.
Under this section, the IRS allows real estate investors to defer the tax liability or capital gains taxes on the sale proceeds of an investment property. Tax deferral allows investors to keep all the equity from the sale of their sold property. This way their equity can continue working for them in their new DST replacement property.
3. Passive Investment
Real estate investors who seek passive investments should consider Delaware Statutory Trusts. DSTs are passive investments that are professionally managed. Investors will not engage in the day-to-day management of the property.
Often, these properties are of the same quality as those owned by large institutional investors. They range from multi-family, NNN retail, industrial, self-storage, medical office, and other assets.
4. Ability to Close in 3 to 5 Days
Another advantage of DSTs is the typical close time of 3 to 5 days following the sale of the relinquished property. This is convenient considering the strict 1031 exchange rules and time deadlines.
Given the DST sponsor has already purchased the properties within a trust, investors can buy a beneficial interest in the trust in a short period of time compared to other options.
Cons of Investing in a Delaware Statutory Trust (DST)
1. Long Hold Periods
Delaware Statutory Trusts have holding periods that range between five and ten years. As an investor, your capital will likely be involved throughout the lifecycle of the DST offering. This holding period for a DST can be lengthy depending on your goals.
This is ideal for those who have long-term capital goals, and plan to be involved in the DST for years. If you’re an investor seeking shorter-term investments, a like-kind 1031 exchange might be the better option for you.
2. Few Early Exit Opportunities
It is very difficult to divest shares of a DST before the full lifecycle is complete. Unlike the stock market or other securities, there is no public market for divestiture, meaning an early exit can be tough.
It’s also common for Delaware Statutory Trusts to place restrictions on the resale of beneficial interests. This means investors need approval from the DST sponsor before any decisions are made. DSTs are securities under Federal law, so divesting has to follow regulations.
3. No Management Control
Most investors prefer hands-on investments. This way, they can leverage their experience and knowledge to boost the value of the asset.
Does this sound like you? If so, DSTs may not be the choice for you.
DSTs are professionally managed with the sponsors making the daily decisions and operations. Individual investors have no ability to make decisions on the management of assets.
4. Investment Fees
Investment fees of DSTs can be large for an investor. The fees are often assessed upfront, during the holding period, and at disposition.
These fees often include selling commission, broker allowance, asset acquisition, disposition expenses, and other organizational expenses.
In summary, investing in a Delaware Statutory Trust can offer many benefits for real estate investors. Yet, it’s important to consider the costs and complexity of trusts, as well as the potential loss of control and limited use that may come with them. As with any big financial decision, it’s important to seek professional advice before investing in a DST.