Structures
Delaware Statutory Trusts, and Who They Actually Suit
A DST solves the identification problem and the management problem at once. It also hands over every decision you used to make.
Illustration generated for this article by 1031 Exchange News Today.
A Delaware Statutory Trust is a fractional ownership vehicle that the IRS treats, under Revenue Ruling 2004-86, as direct ownership of real property for 1031 purposes. That single ruling is why DSTs exist at the scale they do.
What it solves
Two problems at once. The identification problem, because a DST is available, priced and closeable on a predictable schedule, which makes it a reliable thing to name on day 45. And the management problem, because somebody else runs the building.
It is common to see a DST used as a backup identification: name the property you actually want, plus a DST, so that a collapsed deal does not become a failed exchange.
The seven deadly sins
To preserve that treatment the trustee is severely constrained. The restrictions are known in the industry as the seven deadly sins, and they explain most of what a DST can and cannot do.
- No new capital may be contributed once the offering closes.
- Existing debt cannot be renegotiated or new debt taken on.
- Sale proceeds cannot be reinvested; they must be distributed.
- Capital expenditure is limited to normal repairs, minor improvements and legally required work.
- Cash held between distributions must sit in short-term debt obligations.
- All cash beyond necessary reserves must be distributed to holders.
- The trustee cannot renegotiate leases or enter new ones, with narrow exceptions.
The consequence is that a DST cannot adapt. If the market turns and the right move is to refinance or re-tenant, the trustee mostly cannot.
Who it suits
| Situation | Fit |
|---|---|
| Retiring landlord who wants out of management | Strong |
| Investor needing a reliable day-45 backup | Strong |
| Exchange too small to buy quality property alone | Strong |
| Investor who wants control over the asset | Poor |
| Investor who may need liquidity in under 7 years | Poor |
The costs are real and layered
Sponsors charge acquisition fees, ongoing asset management fees and disposition fees. Load figures in the high single digits as a percentage of invested capital are not unusual, and they are disclosed in the private placement memorandum rather than advertised.
Liquidity is the real trade
There is no meaningful secondary market. Hold periods run five to ten years and are set by the sponsor, not by you. An investor who may need the capital back on their own schedule should not be in a DST, however well it solves the day-45 problem.
Disclosure
This article is published by Easy1031, a qualified intermediary with a commercial interest in readers starting an exchange. The rules and mechanics described here are the same whichever intermediary you use. Nothing here is tax or legal advice.
