Delaware Statutory Trust (DST) 1031 Exchange
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 Sponsor/Trustees have powers with respect to the real estate operations and the holders of the beneficial interests have no powers.
The DST property the investor acquires will have a Sponsor *,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
Sponsors do extensive due diligence on the physical property. The Broker/Dealer may perform internal due diligence or contract with independent due diligence legal services to report on the Sponsor’s bona fides and property. So does the lender and the securities industry.
In evaluating the property as part of the deal, 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 lender, in addition to its typical requirements, looks for appropriate debt coverage ratios, and makes sure that there is enough money in escrow at settlement to provide for future anticipated needs, such as tenant improvements and leasing commissions plus a certain level of unforeseen contingencies. The securities industry requires DST properties to be sold via a Private Placement Memorandum (PPM)disclosing all legal and financial information regarding the property and the transaction.
Complete the Exchange or Pay the Tax
Here are some other key facts about how an exchange goes:
– A DST Property marketed via a PPM can often be identified and closed on within the 45 day Identification period.
– The investor can ensure his/her ability to complete the exchange by identifying a property already owned by a Sponsor as a backup.
– Diversification is possible: the minimum cash required for a DST property is less because multiple owners are pooling their money.
– The investor can satisfy debt and equity requirements between two or more properties.
Targeted Economic Benefits
– Costs are streamlined in two ways: 1. Economies of scale – DST properties are generally institutional-quality property. They offer a range in price from $10,000,000 to $160,000,000. 2. Before a DST property is purchased, there is typically an anticipated potential exit strategy in place along with a business plan, thus minimizing contingency costs.
– Pre-arranged non-recourse loans: The duration of the loan is fine-tuned to best coincide with the business plan. Ten years is the usual period of time, which is seen as providing a window sufficient to go through and come out of a recession; also, economically, the ten-year loan is often the best priced option.
– An investor may be able to receive 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 (at investor’s death) a one-time step up in taxable basis, and the deferred tax is never paid.
Lifestyle Advantages
No more hassles related to tenants, repairs, contractors, first of the month accounting, etc. Take a vacation! Any monthly distributions can be direct deposited to your bank. Take pride in owning an institutional quality asset.
A DST 1031 exchange is designed to target protection of investor capital, generating reliable monthly distributions and providing equity growth. Get a deal that helps you to feel better about your financial bottom line for the long term!
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.
– Lack of liquidity
– Potential Reduction or elimination of monthly cash flow distributions.
– Adverse Impact of fees and expenses.
– Bad management
Legal Considerations
A Delaware Statutory Trust is a separate legal entity created as a trust under Delaware Statutory 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 beneficiaries’ assets. The Sponsor has 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.
Testimonials
Our partnership had developed a shopping center in the mid-80s, and in 2002 it was opportune for us to sell. But a straight sale would have meant a tax not only on our gained value, but also on the accrued depreciation — and that would have left next to nothing after taxes. So we knew a 1031 exchange was for us.
Marilee Hill knows the exchange process in detail. And she is constantly in touch with firms offering investment-grade properties specifically structured for exchanges. We ended up with a diversified portfolio, as part-owners of four solid, well-managed income producers: an office park, apartments, a net-leased office building, and another shopping center. And the capital gains tax? Indefinitely deferred.
Our tax situation was both complex and difficult. A real professional, truly knowledgeable, was necessary to guide us throught the maze. We are extremely pleased that we met, employed and worked with Marilee Hill. All of our problems were solved, and the results were way beyond our expectations.