Capital market volatility and rising interest rates paired with unchanged seller pricing expectations from the 2021 era (when the cost of capital was much lower) is making it challenging for exchange buyers to locate quality “like kind” properties for their investment upleg. One option to include in your identification process could be a Delaware Statutory Trust (DST).
Some examples of DST investment opportunities include limited interest in projects involving multifamily acquisitions, self-storage, senior housing or single tenant NNN leased industrial or retail assets.
An interest in a DST gives an investor a pro rata share in the trust which therefore gives them the right to receive distributions from the operation of the trust. This can happen through rental income or the eventual sale of the property – or both. The investor enters the trust as a limited partner, which means they do not have personal deeded title to the property and are subject to the decisions made by the signatory trustee.
Advantages of a DST
While a DST investor does not have authority over the day-to-day operations/management or timing of the sale of the property, there are several advantages this route can offer:
1. Diversification: Through a DST, you can invest in a fractional ownership interest in institutional-quality, income-producing properties with other investors, allowing you to diversify your real estate portfolio across multiple properties and locations.
2. Passive Income: DSTs are designed to provide investors with reliable, passive income streams generated from the underlying properties, which can serve as an additional source of income to supplement other investments or retirement accounts.
3. Tax Benefits: DSTs may offer tax advantages such as depreciation, interest deductions, and the potential for tax-deferred or tax-free income. It is important to note that tax benefits vary depending on individual circumstances and should be discussed with a tax professional.
4. Professional Management: The properties owned by a DST are professionally managed by experienced real estate professionals, which can reduce the day-to-day responsibilities and time commitment required of investors.
5. Limited Liability: As a limited partner in a DST, you have limited liability for the debt and obligations of the trust, which can help protect your personal assets in the event of a lawsuit or other legal action.
Disadvantages of a DST
There are risks identified with any investment route, but here are a few specific disadvantages to DSTs:
1. No guarantee of profits: Investing in a DST does not guarantee profits, and there is a chance that you may lose money.
2. Illiquidity: DST investments are generally illiquid, meaning that you may not be able to easily sell your investment if you need to access your funds. Holding periods are often for 5-10 years.
3. Limited control: As a DST investor, you have limited control over the property and its management, which could impact your returns.
4. Market fluctuations: Real estate markets are subject to fluctuations, and the value of your DST investment may be impacted by changes in the market.
5. Fees and expenses: DSTs often come with fees and expenses, which can impact your overall return on investment.
The pre-packaged nature of DSTs, combined with accessible minimum investment amounts, allows investors the option to create customized and diversified portfolios that can help them better manage their investment risk by alleviating ongoing landlord duties, providing recurring monthly income potential, and offering significant tax advantages. Owners looking for a more “hands-on” approach to ownership, however, may not find that DSTs are a good fit for them.
If you are considering selling your commercial property and want to avoid capital gains, DSTs are just one of many options to consider when contemplating your disposition strategy. While relatively considered “lower risk” and therefore “lower return” they do offer diversification and a landing spot in the event a 1031 buyer is unable to locate a fee simple ownership upleg property suitable for their exchange requirements.
Sterling Commercial Real Estate Advisors and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.