For me, having been exposed to and part of the assemblage of properties dedicated for DSTs, this is an easy one.  The easy answer for me is that if you can acquire a whole property vs. invest in a DST, choose the former!  However, DSTs can certainly be a safe and viable option for many people seeking a passive investment when involved in a 1031 Exchange. If you are an investor with cash equity of $1,000,000 or less coming out of your exchange, the inventory of any viable passive net lease properties is extremely limited. This may be that situation where a DST is the better option.

However, should you be in a position where your 1031 proceeds exceed $1,000,000, I strongly suggest considering a whole property investment as the better alternative: providing the same peace of mind and passive structure, while achieving a far better yield and clearer exit strategy versus the DST option.

All that said, and before simply trusting my opinion, let us go through what a DST is, the basic pros and cons.

Delaware Statutory Trusts (DSTs) are a legal entity commonly used in real estate investment, particularly in the context of 1031 exchanges.

When Delaware Statutory Trusts Make Sense:

  1. 1031 Exchanges:
  • Primary Purpose: DSTs allow investors to defer capital gains taxes by exchanging one investment property for another like-kind property.
  • Fractional Ownership: DSTs allow multiple investors to pool their funds to acquire a larger, institutional-grade property. Again, this caters to those with a smaller amount of 1031 Exchange proceeds.
  1. Passive Investment:
  • Limited Involvement: DST investors typically have a passive role, allowing them to enjoy potential income and tax benefits without active management responsibilities. So do whole property investments if absolute net or ground lease. Arguably, even double net leases.
  1. Diversification:
  • Access to Institutional Assets: Investors can gain exposure to larger, professionally managed properties that might be otherwise unattainable on an individual basis. This is one element that makes a reasonable case for DSTs. Many DST Offerings may have an array of properties that will essentially spread your risk, based on property type, credit profile and location.
  1. Stable Income:
  • Regular Distributions: DSTs often distribute income regularly, providing investors with a steady cash flow. Again, so do whole property investments.
  1. Professional Management:
  • Expert Oversight: Professional asset managers handle day-to-day operations, reducing the burden on individual investors.
  • Should you choose a whole property, Great Rivers can provide asset management services as well, but if the lease is absolute net, the tenant will handle the day-to-day, as well as all property maintenance and repairs.

 

When Delaware Statutory Trusts May Not Make Sense:

  1. Active Management Preference:
  • Hands-On Investors: Of course, if you are an investor that seeks to actively manage your properties, a DST may not be the best fit, as it typically involves a more passive role.
  1. Lack of Control:
  • Limited Decision-Making: Investors in a DST have limited control over property management decisions. If you value control over investment decisions, a DST may not align with your preferences. This is a BIG ONE. You own the property, you make the decisions for you and your family.
  1. Illiquid Investments:
  • Limited Liquidity: DSTs are generally illiquid investments, and it may be challenging to sell your interest before the trust terminates. Another BIG ONE.  You have the complete control of the property and direct contact with the tenant.
  1. Accredited Investor Requirement:
  • To invest in a DST, you must be an accredited investor. The Securities and Exchange Commission (SEC) accredited investor standard is that the individual must make a yearly income of $200,000, or a joint income of $300,000 or more. Net worth over $1 million, regardless of income, can also qualify someone to be an accredited investor.
  1. Complexity and Fees:
  • Complex Structure: The structure of DSTs can be complex, and investors should thoroughly understand the terms and potential fees associated with the investment. The BIGGEST of all. See below.

DSTs assess fees in three varying levels: upfront, operating, and disposition. Sure, legal, loan, and lender expenses are common in real estate acquisitions, but many upfront costs in DSTs are anything but typical, yet part of the industry standard. These upfront fees may include the following:

Sales Commissions

Most DST investments are conducted through third-party selling groups. These groups include registered representatives (Reps) and registered investment advisors (RIAs). Commissions are built into the offering to compensate these groups for raising equity for the DST offering.

Managing Broker-Dealer Allowance

Since DSTs are recognized as securities, DST offerings are often marketed through entities known as “managing broker-dealers.” Broker-dealers typically assist in due diligence, document preparation, sales, and securities compliance.

Wholesaling

Wholesalers work with Reps and RIAs to ensure they receive the information and documents needed to effectively sell the offering. They are typically responsible for a geographical area and can receive a commission for sales associated with the offering.

Offering & Organization Expenses

This may include overhead costs associated with establishing and running the DST, including marketing materials, securities registration, and other miscellaneous costs.

Acquisition

Acquisition fees are payments to the Sponsor for identifying, negotiating, and acquiring the asset in the DST. Sponsors may also take an additional fee for obtaining financing for the acquisition.

Capital for fees and reserve accounts above the purchase price of the underlying asset are commonly referred to as the “front-end load.” It’s important to consider these fees when thinking about returning 100 percent of your capital when it comes time to sell — the greater the load, the higher the underlying property in the DST must be sold for to return investors’ original equity. There can be other fees over the lifespan of the DST as well, including sponsor asset management fees and disposition fees upon the sale of the property.

 

We at Great Rivers have numerous passive net lease properties for you or your clients to consider when considering a 1031 Exchange.  All properties we present are direct to the owner/developer and not listed on the open market, thereby limiting the competitive for the asset.  Please reach out to us with any and all questions!