The Delaware Statutory Trust or DST is a legal entity that was created under Delaware law in 1988. It was originally designed to provide a flexible and efficient way for businesses to hold and manage assets and it was primarily used in the context of securitization transactions. However, in the early 2000s the DST structure gained popularity in the real estate industry as a way for multiple investors to pool their funds and invest in commercial properties. The DST structure allowed investors to enjoy the benefits of real estate ownership such as potential income and appreciation without the need for direct management of the property. Since then, the use of DSTs in real estate investing has grown significantly and they are now commonly used to hold a wide range of properties including apartment buildings, office buildings, shopping centers and industrial properties. The DST structure continues to be popular due to its flexibility tax advantages and ability to provide passive income to investors.
The use of DSTs as a replacement property option in the 1031 Exchange was first allowed by the IRS in 2004. The ruling allowed a taxpayer to exchange an interest in a relinquished property for an interest in a DST, and the ruling stated that the taxpayers interest in the DST would be considered a direct interest in real estate for purposes of the like-kind exchange rules under Section 1031 of the Internal Revenue Code.
Since then, DSTs have become a popular option for 1031 Exchange investors as they allow investors to the first diversify their holdings and potentially achieve passive income from commercial properties without the management responsibilities that come with direct ownership.
I will get into the pros and cons of the DST later, so follow me and stay tuned, however, you should know now that investing in a DST is a securities transaction not a real estate transaction, meaning that in order to qualify for a DST you must be an accredited investor. Simply put, you must have more than $1,000,000 in assets, not including your personal residence or show more than three years of income at $200,000 or greater $300,000 for married couples.
The purpose of this article is to explain the difference between a DST sponsor and a DST provider.
Why?
Because DST providers are springing up all over the country faster than spring flowers after a hard rain. In addition, these providers are claiming to be 1031 Exchange experts, which I find to be misleading in my opinion. Don’t get me wrong, a DST may be a great option for some, but they are most certainly not for everyone and to have a DST provider, who is not a licensed real estate professional, not have the ability to show an investor any and all real estate options, outside of a DST, is a serious problem. And for the record, I have advised many of my clients that a DST is their best choice, only after they’ve seen all options available to them.
A DST sponsor is a company or individual that creates and manages a Delaware Statutory Trust for the purpose of investing in a specific property or portfolio properties. The sponsor is typically responsible for overseeing the DST’s formation and administration, acquiring the properties that will be held by the DST, and managing those properties on behalf of the DST’s investors. The DST sponsor is also responsible for raising capital from investors to fund the purchase of the properties. The sponsor may work with a broker-dealer to market the DST to potential investors and may offer a private placement memorandum that outlines the terms of the investment. As part of its responsibilities, the DST sponsor must ensure that the DST complies with all applicable legal and regulatory requirements, including securities laws and Delaware trust law. The sponsor may also provide ongoing management and reporting to the DST’s investors. In exchange for its services, the DST sponsor typically receives fees and may also hold an ownership interest in the properties held by the DST. The sponsors financial interests are typically aligned with those of the DST’s investors, as the sponsors compensation is often tied to the performance of the properties held by the DST.
A DST Provider is a company that specializes in providing potential clients many different DST options with the DST Sponsors they have relationships with, as well as some of their own DST options if they are set up to have their own offerings, which usually come with a much higher risk factor than those sponsors who are nationally recognized.
To be clear, I am grateful that DST Providers exist. As I mentioned earlier, the DST can be a great exchange option and to have someone who can navigate that opportunity and its process is noteworthy. It is important to me and our industry that investor taxpayers are well informed so that they are making sound investment decisions. The number of failed exchanges every year (more than 60%) is a very high number and I am committed to making a difference in having a significant impact on improving that statistic.
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031 or email at james.bean@svn.com.
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All information is deemed to be accurate, and not advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.