1031 DST's

A Delaware Statutory Trust (DST) 1031 exchange is a purchase by an investor of beneficial interests in the Trust. Where the investor receives a Certificate of Beneficial Interests. The Trustees have powers with respect to the real estate operations and the holders of the beneficial interests have no powers. You need to choose carefully the Trustees.

The DST property the investor acquires will have a sponsor
Sponsor (or the Manager)::

The Sponsor is an entity that offers to Exchange a DST interest in real property to complete their exchange. The Sponsor has either placed the property under contract, built it or purchased it for an exchange. If a purchase, before committing to the purchase the Sponsor analyzes leases, ascertains structural soundness, assesses deferred maintenance and conducts in depth studies of market trends, demographics and tenant needs to determine whether or not the property is a desirable investment purchase. The Sponsor secures non-recourse financing, prepares a Private Placement Memorandum and after acquisition manages the property.

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, who has either placed the property under contract, built it or purchased it for an exchange. The first rule in purchasing a DST property is the Sponsor should have the highest ethical standards, a long successful track record and be who you would want, if necessary, to deal with unforeseen circumstances. If the Sponsor does not have these qualities, you should look elsewhere.

Due Diligence

Extensive due diligence is conducted on these properties by the Sponsor/Trustees, the lender and the securities industry. The Sponsor/Trustees analyzes leases, ascertains structural soundness, assesses deferred maintenance and conducts in depth studies of market trends, demographics and tenant needs to determine whether or not the property is a desirable investment purchase. The lender in addition to its typical requirements looks for high debt coverage ratios and dictates that sufficient dollars are placed in escrow at settlement to provide for future vacancies and the resulting tenant improvements and leasing commissions. The securities industry requires DST properties to be sold via a Private Placement Memorandum (PPM)
Private Placement Memorandum (PPM):: Private Placements are exempt from registration under the Securities Act of 1933 and most are offered under Regulation D. The offering memorandum for a property includes disclosures of information obtained from the issuer including the nature, character, and risk factors relating to the offering. It is prepared by legal counsel from information provided by the issuer. ×
disclosing all legal and financial information regarding the property and the transaction.

Complete the Exchange or Pay the Tax

  • A DST Property marketed via a PPM can often be identified and closed within the 45 day Identification period
    45 day Identification period (the 45 day rule):: The exchanger must identify all potential replacement property within the first 45 days of the 180 day exchange period. ×
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  • The investor can ensure his ability to complete the exchange by identifying a property already owned by a Sponsor as a backup.
  • As the minimum cash required for a DST property is less because multiple owners are pooling their money, the opportunity to diversify and buy more than one property is realistic. Diversification can help minimize risk.
  • The investor can satisfy his debt and equity requirements between two or more properties.

Economic Benefits

  • Costs are streamlined in two ways: 1. Economies of scale - DST properties are generally institutional quality and range in price from $10,000,000 to $160,000,000. 2. Before a DST property is purchased there is typically a business plan and an exit strategy thus limiting multiple contingency costs.
  • Pre-arranged non-recourse loans: The duration of the loan is fine tuned to best coincide with the business plan and maximize current market interest rate options.
  • An investor can anticipate immediate monthly distributable cash flow, quarterly updates and annual reports.
  • An investor can continue to defer the tax with multiple sequential 1031 exchanges. Many DST properties have a 3-7 year business plan.
  • Heirs receive a one time step up in taxable basis, which means if the investor becomes deceased, the deferred tax is never paid.

Lifestyle Advantages

No more hassles of tenants, repairs, contractors, first of the month accounting, etc. Take a vacation! The monthly distributions can be direct deposited to your bank. Take pride in owning an institutional quality asset. Keep living! A DST 1031 exchange is designed to protect investor capital, generate reliable monthly distributions and provide equity growth. The goal is to produce the best possible returns reflective of your risk-comfort zone. Risks::

Clients should keep in mind the following possible risks:

  • Potential for property value loss.
  • Possible change in tax status.
  • Potential for lack of disclosure.
  • Illiquidity.
  • Potential reduction or elimination of monthly cash flow distributions.
  • Adverse impact of fees and expenses.
  • Loss of management control.
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Risks

Clients should keep in mind the following possible risks:
  • Potential for property value loss.
  • Possible change in tax status.
  • Potential for lack of disclosure.
  • Illiquidity.
  • Potential Reduction or elimination of monthly cash flow distributions.
  • Adverse Impact of fees and expenses.
  • Loss of management control.

Legal Considerations

A Delaware Statutory Trust is a separate legal entity created as a trust under Delaware statutary law. (DST) 1031 exchange is a purchase by an investor of beneficial interests in the Trust. The investor receives a Certificate of Beneficial Interests. Bankruptcy creditors of the beneficiaries cannot reach the DST's property. The Trustees have powers with respect to the real estate operations and the holders of the beneficial interests have no powers. Each PPM contains a legal opinion discussing the structure and its compliance with Rev Proc 2004-86.