Delaware
Statutory Trusts
WHAT ARE THEY, AND ARE THEY RIGHT FOR YOU?
© 2021 Realized Holdings, Inc.
2
What is a DST?
4
Advantages of a DST
7
Disadvantages of a DST
10
Additional Considerations
for DSTs
12
How to Invest in a DST
Table of
Contents
© 2021 Realized Holdings, Inc.
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What is a DST?
A Delaware Statutory Trust, or DST, is a real estate investment vehicle
constructed under Delaware law. Despite the name, neither the
property nor the investors need to be located in Delaware. DSTs are
professionally managed passive income seeking investments that
cover a wide range of property types, including multi-family apartment
complexes, industrial buildings, self-storage facilities, commercial office
buildings, and more.
Multiple investors pool their equity in a DST. Each investor owns their
share of a Trust, which in turn owns the property. Ownership in the DST
is in proportion to the amount of equity investment of each investor.
Investors are known as “beneficiaries” of the Trust. As with a tenantsin-common, or TIC, ownership structure, the IRS treats DST interests as
direct property ownership, thus qualifying for a 1031 Exchange. However,
unlike direct property ownership, the DST structure shields investors
from property-related liabilities.
A DST operates similarly to a limited partnership, but with a different
legal structure in order to be eligible for 1031 Exchange investments.
A Sponsor “packages” the DST investment by finding the property,
performing due diligence, securing financing, acquiring the asset, and
retaining management prior to interests being offered to individual 1031
investors. Each investor owns their proportionate share of equity in the
DST. As a result, each investor is entitled to their proportionate share of
any potential income produced by the DST.
The DST structure also protects individual beneficiaries from creditors
who may want to place liens against the property, giving greater security
to lenders and other beneficiaries. DSTs are typically financed with nonrecourse debt, which limits a lender’s remedies to the DST’s underlying
property. Beneficiaries of a DST do not carry any personal liabilities
under the loan.
© 2021 Realized Holdings, Inc.
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Differences
Between DSTs
and TICs
A tenants-in-common (TIC) structure is another
1031-qualified form of ownership for holding title to real
estate with more than one party. The 1031 TIC structure
allows multiple investors to puruse the 1031 tax deferral
benefits of directly investing in a property as tenants-incommon. Unlike a DST, where each co-owner owns part of
the DST that then owns properties, under a TIC structure
each investor owns a separate and undivided interest in a
property, thereby qualifying for tax deferral treatment.
For more information about TICs, read our eBook.
Figure 1: Differences Between DSTs and TICs1
DST
TIC
Number of Investors
Unlimited, though typically capped at 499
Up to 35
Investor Ownership
Percentage of beneficial ownership in a Trust
that owns the property
Undivided interest in the property
Number of Borrowers
1 (the DST)
Up to 35 (each investor is a borrower)
Major Decisions
Provided by DST structure
Equal voting rights and unanimous consent
Bankruptcy Remote
Not needed
Investors must form Single Member LLC
Investor Guarantees
No investor voting rights
Investors generally required to provide
“carve-outs”
IRS Guidance
Revenue Ruling 2004-86
Revenue Procedure 2002-22
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TIC properties employ professional asset and property management, so while TIC co-owners vote on major issues, they do not have direct say over day-to-day
property management situations.
Because they are private placements, TICs are illiquid securities. There is no secondary market for TIC investments. Moreover, the form of ownership may
require unanimous consent to sell a TIC interests.
Like any investment in real estate, if a TIC property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow
distributions.
© 2021 Realized Holdings, Inc.
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Advantages
of a DST
DSTs strive to provide long-term, recurring income,
typically each month or quarterly. Income from a DST
may provide tax advantages. Income from a DST may
provide tax advantages to the extent an investor is
able to deduct their proportionate share of mortgage
interest and depreciation.
Here are a few possible advantages:
NO LANDLORD DUTIES
1031 EXCHANGE ELIGIBILITY
SIMPLIFIED INVESTMENT PROCESS
CAN FIT ANY SIZE EXCHANGE
QUALITY PROPERTIES
DIVERSIFY REAL ESTATE HOLDINGS
© 2021 Realized Holdings, Inc.
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No Landlord Duties
DST investments are “packaged” by a Sponsor who
is responsible for all property management, asset
management, and property operations. The Sponsor
typically has an extensive background in managing and
maintaining the types of properties in their respective
DSTs. Sponsors typically provide periodic investor reports
on the performance of the underlying DST properties.
Investors are generally shielded from personal liability
beyond their investment.
1031 Exchange
Eligibility 2
A 1031 Exchange is designed to allow real estate
investors to sell (or as the IRS calls it, “relinquish”)
an investment property while deferring capital gains
taxes on the profit by reinvesting the proceeds in a
“replacement” investment property.
Investors have turned to 1031 Exchanges in an effort to
to defer capital gains taxes, as well as additional tax
liabilities, including state capital gains taxes (in some
states), Affordable Care Act surtaxes, and depreciation
recapture taxes. Exchanges may allow investors to
defer these taxes indefinitely provided they continually
reinvest capital back into real estate — the IRS allows
subsequent exchanges each time a property is sold,
which allows your equity to potentially continue growing
tax-deferred over time. 3
Seek To Simplify
The Investment
Process
DST investments are “pre-packaged,” meaning the
mortgage is already in place and property due diligence
such as title, survey, and environmental assessment has
been completed. DST investments can be completed
quickly with limited paperwork. There is also a reduced risk
of missing the 45-day or 180-day 1031 Exchange deadlines
to find a replacement property by investing in DSTs.
Terms to Know:
SPONSOR
The firm that has created the DST investment
for consideration finding, acquiring, financing,
and managing the DST property on behalf of
its investors.
LIMITED PERSONAL LIABILITY
The DST is the borrower, not the individual
investors. Like a corporation or LLC, investors
are not personally liable for any debts of the
DST beyond the value of their investment.
45-DAY IDENTIFICATION PERIOD
Replacement property(ies) must be identified
within 45 days of the date of sale of the
relinquished property.
180-DAY CLOSING PERIOD
Replacement property(ies) must be purchased
within 180 days of the sale of the
relinquished property.
Costs associated with the transaction may impact investor’s returns and
may outweigh the tax benefits.
3
The income stream and depreciation schedule for any investment property
may affect the property owner’s income bracket and/or tax status. An
unfavorable tax ruling may cancel deferral of capital gains and result in
immediate tax liabilities.
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© 2021 Realized Holdings, Inc.
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Can Fit Any Size
Exchange 4
Diversify Real
Estate Holdings 6
Because DSTs are “pre-packaged,” they can be purchased
in $1,000 increments. 4 These interests can be sized to
the amount of proceeds an investor has to exchange,
and are an option if they have “leftover” 1031 funds from
purchasing other properties. If an investor invests in
a DST property, they are allocated their proportionate
share of the mortgage, so it can be designed to match
their previous debt-equity ratio on the property they are
exchanging.
It is possible to evaluate a variety of potential investment
options across the US when considering investing in
DSTs. Because of the flexibility in equity requirements,
an investor may choose to diversify their 1031 investment
into multiple DSTs. For example, an investor with
$500,000 in 1031 Exchange funds may invest $100,000
in a DST owning a 300-unit apartment complex in Tampa,
$200,000 in a DST downtown office building in Denver
and $200,000 in DST retail properties in Portland.
Quality Properties
DST Investments may provide access to properties that
may otherwise be out of reach for individual investors
based on their 1031 Exchange funds. By pooling their
equity with other co-owners, an investor is able to
own a portion of a property that may otherwise be
an unattainable investment. For example, an investor
could exchange $500,000 of equity into a $20,000,000
property. Assuming the deal was capitalized with 50%
debt and 50% equity, the investor would own 5.0% 5 of the
replacement property.
© 2021 Realized Holdings, Inc.
Subject to minimum investment size established by the Sponsor.
Ownership based on percentage of equity invested in example.
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Diversification does not guarantee a profit or protect against a loss in a
declining market. It is a method used to help manage investment risk.
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5
6
Disadvantages
of a DST
Despite its many advantages, the DST investment
structure does have its limitations. In order to qualify for
a 1031 Exchange, DSTs are subject to certain prohibitions
established by the IRS:
01
Once closed, no additional capital contributions to
the DST are allowed.
02
Cannot renegotiate terms of existing loans nor
borrow any new funds.
03
The DST cannot reinvest proceeds from the sale of
the property; they must distribute all proceeds to
the beneficiaries.
04
Capital expenditures are limited to (a) normal repair
and maintenance, (b) non-structural improvements,
and (c) those required by law.
05
Cash held between distributions may only be
invested in short-term debt.
06
All cash, other than reserves, must be distributed on
a current basis.
07
Trustee cannot enter into new leases or renegotiate
current leases.
In addition to the qualifying limitations, there are
additional disadvantages to consider before investing
in a DST.
© 2021 Realized Holdings, Inc.
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Illiquid Asset 7
Commercial real estate is considered an illiquid asset,
meaning it may take substantial time and costs to sell a
property. DSTs may be even more illiquid as an individual
investor has limited or no control over property sale
decisions. Under a DST structure, property sale decisions
are made entirely by the Trustee. DST interests are legally
transferrable, so interest owners may be able to sell
their interests early on the Realized Secondary Market.
However, even with this option, there is no guarantee of
sale.
Passive Investment
Terms to Know:
ILLIQUID ASSET
Asset that cannot be sold quickly without a
substantial loss in value.
SECONDARY MARKET
Market where investors purchase securities
or assets from other investors, rather than
from issuing companies themselves. National
exchanges such as the NYSE or NASDAQ are
secondary markets for stocks.
Some investors may consider passive ownership to be an
attractive feature of DST investments. However, for those
used to a more “hands-on” approach, this structure may
be an adjustment for them. The pre-packaged feature is
designed to make investing more efficient, but precludes
investors from having input in decisions like the lender
or property manager. Individual investors have little to
no control in property operations or major decisions. The
success of the investment is largely dependent on the
operating abilities of the Sponsor.
Fixed Investment
Period
To help ensure 1031 Exchange compliance, DST
investments are typically required to hold a property for
a minimum of two years. These structures usually have
target holding periods of five (5) to seven (7) years, and
therefore are not well-suited for an investor looking for a
temporary investment. Investors have limited control over
the timing of property dispositions and should assume
they will be holding the investment for the life of its
program.
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No public market currently exists, and one may never exist, for the
interests of any DST program. The purchase of interests in any DST
program is speculative and is suitable only for persons who have no
need for liquidity in their investment and who can afford to lose their
entire investment.
© 2021 Realized Holdings, Inc.
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Lower Returns
8,9
Figure 2: Understanding Tax Sheltering10
Tax Sheltered
However, while it may appear that DSTs offer lower
return on the surface, it’s important to evaluate an
investment’s after-tax cash flow. When trying to measure
your projected cash flow return, the key is not to focus so
much on the top dollar amount; what matters at the end
of the day is how much you have after taxes. Because
we believe, it is not how much money you make, but how
much money you keep.
50% Interest
Deduction
$50,000
30% Depreciation
Allowance
Thus, when evaluating DST opportunities, pre-tax
distribution rates may not be the appropriate unit of
comparison. For example, if two investments have
identical pre-tax distribution rates, but one has no
income tax shelters, while the other’s distributions are
fully sheltered, then the after-tax distributions may be
significantly different.
$50,000
Taxable Income
It is important to recognize that income tax shelters are
specific to the investment and an individual’s tax situation;
and while the use of debt may provide income tax
shelters, it may add risk to an investment.
The income stream and depreciation schedule for any investment property
may affect the property owner’s income bracket and/or tax status. An
unfavorable tax ruling may cancel deferral of capital gains and result in
immediate tax liabilities.
9
Realized does not provide tax or legal advice. This material is not a
substitute for seeking the advice of a qualified professional for your
individual situation.
© 2021 Realized Holdings, Inc.
Taxable Income
$20,000
$100,000
28% Tax Rate
28% Tax Rate
$5,600
$28,000
After-Tax Income
After-Tax Income
$94,400
10
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Without Sheltering
$72,000
Figures are hypothetical and for illustrative purposes only. Illustration
is not intended to represent the past or future performance of any
specific investment. There is no guarantee that the income or investment
objectives of any particular program will be achieved. Actual results may
be more or less favorable based on investment selection and investorspecific tax situation.
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Additional
Considerations
for DSTs
HOW CAN THE DST OPERATE
WITHOUT NEGOTIATING LEASES?
WHAT IF THERE ARE UNFORESEEN
PROBLEMS WITH A DST’S PROPERTY?
© 2021 Realized Holdings, Inc.
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How Can the DST
Operate Without
Negotiating
Leases?
What if There
are Unforeseen
Problems with a
DST’s Property?
Under the DST structure, the Trustee may not enter into
new leases or renegotiate existing leases. If the DST
owns Triple Net (NNN) Properties, this is not a problem.
But apartments, office buildings, and other types of retail
properties require a Master Lease. The Master Lease
agreement is put in place when the DST purchases
the property. The Master Tenant, which is usually an
affiliate of the Sponsor, assumes all property operating
responsibilities. The Master Tenant makes lease payments
to the DST generally in an amount equal to required
debt service payments plus a stated return to the DST’s
owners.
If the DST is in danger of losing the property due to its
structural limitations, it may convert into an LLC. This
“Springing LLC” contains the same protections as the
DST, but does NOT prohibit raising additional equity,
renegotiating existing debt, obtaining new financing, or
entering into new leases. Once a DST is converted to an
LLC, it will be treated as a partnership for tax purposes.
Investors will NOT be able to do a 1031 Exchange if the
LLC sells the asset. However, there are no prohibitions
against converting back to a DST after making necessary
adjustments. It is possible that if a DST is forced to
convert into an LLC, its investors may lose their ability to
do subsequent 1031 Exchanges.
Terms to Know:
TRIPLE NET (NNN) PROPERTY
These are typically single-tenant retail
properties leased to tenants with high
credit ratings on “net, net, net” terms (hence
the NNN acronym), meaning the tenant is
responsible for real estate taxes, insurance,
and all maintenance.
© 2021 Realized Holdings, Inc.
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How to Invest
in a DST
Investing in a DST is relatively straightforward and can be accomplished in
three steps:
01
PREPARE
02
CHOOSE AN INVESTMENT
03
DEPOSIT & CLOSE
© 2021 Realized Holdings, Inc.
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STEP 01
Prepare
Terms to Know:
Investments are subject to the same rules as all
1031 Exchange transactions. Follow these tips when
considering an exchange:
QUALIFIED INTERMEDIARY
Consult your accountant and financial advisor before
selling your current investment property to ensure you are
making a suitable investment for your goals.
An independent person, company, or entity
that enters into a written agreement with
the exchanger to facilitate the transfer of
proceeds from the exchanger to the buyer
of the relinquished property and from the
exchanger to the seller of the replacement
property to effect a tax deferred exchange
under IRC Section 1031.
CHOOSE A QUALIFIED INTERMEDIARY (“QI”)
BROKER-DEALER
Sale proceeds must be held by a QI during the exchange.
A QI can also help make sure you are following all 1031
Exchange guidelines.
A firm in the business of buying and selling
securities. A broker arranges for the sale
of securities held by customers whereas a
dealer sells securities that they currently
own or control. The registered financial
professionals who work for broker-dealers—
the sales personnel whom some people refer
to as stockbrokers—are technically known as
registered representatives.
SEEK ADVICE
KNOW YOUR NUMBERS AND DATES
Consider both cash and mortgage requirements, as well
as the 45-day identification and 180-day investment
periods required when performing at 1031 Exchange.
STEP 02
Choose an
Investment
DSTs historically were only available through registered
Broker-Dealers (BDs). Your advisors’ firm may be a BD
or can recommend one. Recent regulatory changes now
allow online marketplaces, such as Realized, to offer
investments in DSTs. Investors can evaluate multiple
opportunities and select one or more investments that
meet their objectives.
STEP 03
Deposit & Close
After selecting a DST that meets your goals, you typically
will be required to make a non-refundable deposit
in order to secure your position in the investment.
Due to timing requirements of 1031 Exchanges, these
opportunities can fill quickly. As properties are typically
already acquired, investors can close the transaction
and complete their 1031 Exchange in short order. Your QI
can help you finalize the transaction. Cash distributions
are typically paid on a quarterly or monthly basis and
deposited into your bank account or check that is sent to
your home.11
For more information about 1031 Exchanges, read our
eBook, What is a 1031 Exchange?
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© 2021 Realized Holdings, Inc.
The actual amount and timing of distributions paid by programs is not
guaranteed and may vary. There is no guarantee that investors will receive
distributions or a return of their capital.
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Our online Marketplace allows
1031 investors to compare a wide
variety of DST replacement
properties side-by-side. Evaluate,
invest, and manage your 1031
Exchange investments on a simple,
secure platform, backed by a team
of professionals.
Visit marketplace.realized1031.com to
explore the Realized Secondary Marketplace
QUESTIONS?
INFO@REALIZED1031.COM
(512) 387-1000
© 2021 Realized Holdings, Inc.
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Disclosures
Securities offered exclusively through Thornhill Securities, Inc., a registered broker/dealer and
member of FINRA/SIPC(“Thornhill”). Investment advisory services are offered through Thornhill
Securities, Inc. a registered investment adviser. Thornhill Securities, Inc. is a wholly owned
subsidiary of Realized Holdings, Inc.(“Realized”).
Realized does not offer legal or tax advice. Please consult the appropriate professional
regarding your individual circumstance.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a
method used to help manage investment risk.
There are material risks associated with investing in DST properties and real estate securities
including liquidity, tenant vacancies, general market conditions and competition, lack of
operating history, interest rate risks, the risk of new supply coming to market and softening
rental rates, general risks of owning/operating commercial and multifamily properties, short
term leases associated with multi-family properties, financing risks, potential adverse tax
consequences, general economic risks, development risks, long hold periods, and potential
loss of the entire investment principal. Past performance is not a guarantee of future results.
Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a
complex tax concept; consult your legal or tax professional regarding the specifics of your
particular situation. This is not a solicitation or an offer to sell any securities.
Realized Holdings, Inc.
Austin, TX
www.realized1031.com
info@realized1031.com
877.797.1031
THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES DESCRIBED HEREIN. AN OFFERING IS MADE ONLY THROUGH DELIVERY OF
THE PPM. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PPM
WHICH SHOULD BE READ IN ITS ENTIRETY IN ORDER TO UNDERSTAND FULLY ALL OF THE
IMPLICATIONS AND RISKS OF THE OFFERING OF SECURITIES TO WHICH IT RELATES.
Neither the SEC nor any other state or federal regulator has passed on or endorsed the
merits of these securities and has not confirmed the adequacy or accuracy of the PPM. Any
representation to the contrary is unlawful. All information contained in this material is qualified
in its entirety by the terms of the current PPM.
All investors must be “accredited investors” and/or “qualified purchasers” as defined in the
securities laws before they can invest.
Any investments or strategies referenced herein do not take into account the investment
objectives, financial situation or particular needs of any specific person. Product suitability
must be independently determined for each individual investor.
Risk tolerance is an investor’s general ability to withstand risk inherent in investing. There is no
guarantee a recommended portfolio will accurately reflect your tolerance to risk.
Alternative investments have higher fees than traditional investments and they may also
be highly leveraged and engage in speculative investment techniques, which can magnify
the potential for investment loss or gain and should not be deemed a complete investment
program. The value of the investment may fall as well as rise and investors may get back less
than they invested.
All real estate investments have the potential to lose value during the life of the investment. All
financed real estate investments have the potential for foreclosure.
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