Benefits of a Delaware Statutory Trust
What is the benefit of a DST? Many investors choose a DST because it offers potential returns on real estate holdings without many of the complications of property management.
For the purposes of a tax-deferred 1031 exchange, the purchase of a beneficial interest in a Delaware Statutory Trust is treated as a direct interest in real estate, thus satisfying that requirement of IRS Revenue Ruling 2004-86. A DST can also be an attractive investment vehicle for investors who are not conducting a 1031 exchange. In addition to all the benefits of securitized real estate, investors purchasing an interest in a DST enjoy the following additional benefits:
1. No Need for Unanimous Owner Approval
Perhaps the most significant advantage of Delaware Statutory Trusts is that the unanimous approval of the individual owners (investors) is not required in order to deal with unexpected, adverse developments. During the recent recession, which of course significantly affected the real estate market, some TIC structures were hindered from taking the necessary actions to mitigate loss, simply because one of the owners, a so-called “rogue investor,” did not approve of the action desired by the majority. So while DST offerings are selected and structured to lessen the risk from such possibilities, all risk cannot be removed, and it is an additional protection to the investors that the signatory trustee is empowered to take necessary actions (restructure financing, renegotiate leases, sell the property, etc.) to reduce loss.
2. Less Expensive, Easier Financing
Another chief advantage of Delaware Statutory Trusts is that the lender deals with the trust as the only borrower, making it easier and less expensive to obtain financing. This is in contrast to a TIC arrangement where the lender needs to approve up to 35 different borrowers. Because the loan is obtained by the trust, there is no need for the individual investors to be qualified and their participation in the trust does not affect their credit rating.
3. No Need to Sign Loan Carve-Outs
Since the investor’s only right with respect to the Delaware Statutory Trust is to receive distributions, and they have no voting authority regarding the operation of the property, the investor fraud carve-outs are eliminated. The lender looks only to the sponsor/signatory trustee for these carve-outs from the non-recourse provisions of the loan.
4. Limited Personal Liability
Delaware Statutory Trust investors enjoy limited liability to their personal assets due to the bankruptcy-remote provision of the DST. This means that even in the event that the trust fails and goes into bankruptcy, the most that investors would likely lose is their investment in the trust. Any potential creditors of the trust, or the lender, would be limited by provisions in the trust from reaching the other assets of the investors. Therefore, no LLC entity is necessary to hold a DST investment.
5. Lower Minimum Investment
Because a private placement Delaware Statutory Trust offering may have up to 499 investors, the minimum investment amounts are significantly lower. Most DST sponsors will set arbitrary minimum investment levels to limit the number of investors to a manageable number, but cash investments can be as low as $25,000 and 1031 exchange minimums are often $100,000.
6. No Closing Costs
Delaware Statutory Trust investors typically have no closing costs associated with the creation of a single member LLC as in a TIC offering, saving as much as $5000 per investment.
7. No Need to Maintain an LLC
Delaware Statutory Trust investors do not have to maintain an LLC by paying annual state filing fees that may dilute cash flows.
8. No Trustee Term Time Limit
The signatory trustee of the Delaware Statutory Trust will generally be the sponsor of the private placement offering or one of its affiliates. Unlike a TIC deal, there is no one-year time limit on the trusteeship or the term of the property manager. This will give the lender comfort that the sponsor will have a continuing presence in operating the property.
9. No Inadvertent Termination
A Delaware Statutory Trust also has a Delaware trustee (required by statute), so there is no worry that the trust will inadvertently terminate.
10. No Management Responsibilities
Acquiring a DST property relieves investors of the responsibilities of sole ownership. Instead of being responsible for tenant complaints, facility issues and other considerations, DST investors are only responsible for contributing their share of the investment.