ABOUT DSTs

DELAWARE STATUTORY TRUSTS

DSTs

In 2004, the IRS issued IRC Revenue Ruling 2004-86, which authorizes the use of a DST, or Delaware Statutory Trust, to be used within the context of a §1031 like-kind exchange when someone executes the sale of an investment property. DSTs are securitized real estate offerings. Highly modular in nature and coming in many shapes and sizes, they solve a few common 1031 problems, notably:

1. The seller is interested in capitalizing on the tax deferral benefit a 1031 exchange offers but is not interested in the headaches of actively owning and managing another property or set of properties;

2. The seller is in a 45-Day time crunch for their Identification Period and in jeopardy of their exchange derailing entirely and resulting in taxes due;

3. The seller has difficulty matching up debt and/or equity in their exchange;

4. The seller has “boot”, or scraps of equity left on the table that will be exposed to taxes if not deployed into a replacement property;

We work exclusively with premiere sponsors, aligning our core values with our clients’ wellbeing.

SPONSORS WITH A TRACK RECORD

The members of your 1031 real estate advisory circle should be upstanding and reputable. Do not fall for smoke and mirrors or unrealistic promises! Choose a DST sponsor that will have your back, and do the right thing even in the toughest of times.


Potential Benefits of 1031 DSTs:

  • Diversification: DST investors can diversify their 1031 exchange funds not only by asset class but also across different geographic locations throughout the US.
  • Lower minimum investment: DSTs often start at a minimum investment threshold of $100,000.
  • Leaner fees that a TIC investment: This is possible mostly because a DST investment does not require a special purpose LLC entity, which carries its own annual maintenance fees and expenses.
  • Potential for higher cash flow: DSTs have a projected cash flow based on the anticipated rental income of the underlying asset(s). Some DST investors will enjoy higher cash-on-cash returns via DSTs than they previously did with their relinquished investment property. It should be noted however that rental income and expenses can increase or decrease unexpectedly.
  • Broader access: Access to larger commercial properties which typically require more capital outlay to invest in.
  • Non-recourse LTV: Unlike a TIC investment, individual investors are not on the hook for any loan amounts built into the DST. Furthermore, loans are underwritten at the sponsor level and not on the individual investors themselves.
  • Built-in Financing: For those investors that need to match up LTV on their exchange, the predetermined loan amounts native to some DSTs can make this requirement much less stressful.


Potential Risks of 1031 DSTs:

DSTs are subject to real estate risk and as such, can be adversely affected by market conditions. There can be no assurance that a property will perform as projected and all DSTs are subject to some of the more traditional risks of owning, selling, and operating real estate.

  • Illiquidity: A DST interest is an illiquid investment and there is no current active secondary market for selling your fractional-ownership interest.
  • DST investors do not hold title to the investor but rather own beneficial interests in the trust and the sponsor controls the selling and managing of the property. The DST owners have limited control over the investment and are reliant on the sponsor.
  • The enabling IRS revenue ruling which forms the basis for a DST transaction in a Section 1031 exchange program has prohibitions on the powers of the trustee, which are built into the Trust Agreement and have become known as the “Seven Deadly Sins”
  1. Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries.
  2. The Trustee cannot renegotiate the terms of the existing loans nor can it borrow any new funds from any party unless a loan default exists as a result of a tenant bankruptcy or insolvency.
  3. The Trustee cannot reinvest the proceeds from the sale of its real estate.
  4. The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements and (c) those required by law.
  5. Any reserves or cash held between distribution dates can only be invested in short term debt obligations.
  6. All cash, other than necessary reserves, must be distributed on a current basis, and
  7. The Trustee cannot enter into new leases or renegotiate the current leases, unless there is a tenant bankruptcy or insolvency.
  • Because of the DST restrictions the best types of real estate for a DST are Master Lease transactions where the Master Tenant takes on all the operating responsibilities or a Triple Net/Net Long Term Lease with a financially stable tenant. Additionally, it is prudent with DSTs to have sufficient upfront and ongoing reserves, as well as a plan for a sale prior to the maturity of a loan.
  • Additionally, there is a “Springing LLC” provision option which could convert the trust to a limited liability company to solve property issues. However, this could prevent future 1031 ability and adversely affect the value of their investment.
  • One additional approach to give the Lender comfort is to place an operative provision in the Trust Agreement that if the trustee determines that the DST is in danger of losing the Mortgaged Property due to tax related restrictions on the trustee’s ability to act, (the seven deadly sins), it can convert the DST into a limited liability company (the “Springing LLC”) with a Lender-approved operating agreement. Delaware law permits the conversion by what is basically a simple election and which does not constitute a transfer under Delaware law. The “Springing LLC” will contain the same SPE and bankruptcy remoteness provisions as the DST (for the Lender’s benefit), but it will not contain the prohibitions against the raising of additional funds, the raising of new financing or renegotiation or the terms of the existing financing or entering into new leases. In addition, it will provide that the trustee (or Sponsor) will become the manager of the LLC.
  • Fees and Expenses of each offering should be carefully evaluated. Multiple owner offerings typically have additional expenses to owning real estate on your own and these fees should be weighed against specific capital gains tax liability. All investors are encouraged to have their tax and legal counsel advise them on taxes including any federal and state capital gains taxes, depreciation recapture and the recent 3.8% Medicare tax, which could be applicable.
  • Reduction or Elimination of Monthly Cash Flow Distributions: Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is a potential for suspension of cash flow.
  • Potential for Property Value Loss: All real estate investments have the potential to lose value during the life of the investment.
  • Potential for Foreclosure: All financed real estate investments have the potential for foreclosure.


Please note that DSTs are available exclusively to accredited investors defined as:

An accredited investor, in the context of a natural person, includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

SOURCE: “Accredited Investors.” SEC Emblem, 16 July 2012, https://www.sec.gov/fast-answers/answers-accredhtm.html.

There are other categories of accredited investors, including the following, which may be relevant to you:

  • any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, or
  • any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

EXCLUSIVE ACCESS TO INSTITUTIONAL QUALITY REAL ESTATE.

Our key insights have guided the Rob 1031 mission, pioneering ways to offer discerning investors access to thoroughly vetted commercial real estate opportunities.

Our approach blends personalized service, proven business discipline and data-driven insights. This allows our members to diversify their portfolios with investments in individual properties and Real Estate Investment Trusts (“REITs”).

THE SEARCH FOR WELL-MANAGED, CASH-FLOWING BUILDINGS.

Our mission is to help members invest with confidence. We only consider deals that pass our stringent due diligence process, and offer investors full visibility into every opportunity on our platform.

We look for well-leased properties or those with leases in hand.

We do not invest in non-cash flowing investments such as ground-up construction or raw land.

We only work with select real estate partners with proven track records and experience managing assets.


ACCESS AND MORE


OUR BELIEFS

  Discerning investors should have access to institutional-quality real estate opportunities.

  Investing in real estate offers a smart way to meet diversified portfolio goals.

  Investors should have access to dedicated service and licensed investment professionals.

  Human intelligence should validate technology.


OUR PROMISES

  Prioritize investor protection with thorough processes, and tried-and-true business sense.

  Adhere to our strict fundamentals, including investing in properties that are well-leased or have other appealing attributes.

  Maintain a fully dedicated asset management team who supports each transaction through its lifecycle starting with the initial investment.

  Continue investing in data and technology to vet each deal.