Delaware Statutory Trusts (DSTs) are attractive for investors seeking passive income and potential tax benefits. With the myriad of DST offerings available, choosing the right one for your specific investment goals takes time and effort. Known as a Delaware Statutory Trust, this type allows investors to own fractional interests in significant, institutional-quality real estate assets. DSTs are often used as replacement properties in 1031 exchanges, enabling investors to defer capital gains taxes while diversifying their real estate portfolios.
DST selection factors
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Investment objectives
The first step in selecting the right DST is clearly defining your investment objectives. Are you primarily seeking:
- Regular income
- Capital appreciation
- Tax benefits
- Portfolio diversification
Different DSTs cater to various investment goals, so understanding your priorities will help narrow your options.
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Property type and location
DSTs invest in various types of real estate, including:
- Multifamily apartments
- Office buildings
- Retail centres
- Industrial properties
- Self-storage facilities
- Healthcare properties
Consider which property types align with your investment strategy and risk tolerance. Evaluate the properties’ geographic locations within the DST.
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Sponsor experience and track record
The sponsor, or the company managing the DST, plays a crucial role in the investment’s success. Research the sponsor’s experience in the specific property type and market. Look for sponsors with:
- A proven track record of successful DST offerings
- Transparent reporting and communication with investors
- Strong asset and property management capabilities
- Affiliation with investors and financial stability
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Investment structure and terms
Carefully review the DST’s offering documents to understand:
- Minimum investment requirements
- Expected hold period
- Distribution frequency and projected yields
- Fee structure (acquisition fees, asset management fees, etc.)
- Exit strategy
Ensure that these terms align with your investment timeline and liquidity needs.
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Tax considerations
If you’re using a DST as part of a 1031 exchange, ensure it qualifies as like-kind property and meets all IRS requirements. It would be best if you also considered the potential tax implications of the DST’s income distributions and eventual sale.
DST UPREIT option
An important concept to understand when exploring DST investments is the DST UPREIT structure. A UPREIT stands for an umbrella partnership real estate investment trust. This structure combines the benefits of a DST with those of a Real Estate Investment Trust (REIT). In a dst upreit transaction, investors can exchange their DST interests for operating partnership (OP) units in a larger REIT. This option provides several potential advantages:
- Enhanced liquidity – OP units can often be converted to REIT shares, typically more liquid than DST interests.
- Further diversification – By exchanging into a REIT, investors gain exposure to a more extensive, diversified portfolio of properties.
- Continued tax deferral – The exchange of DST interests for OP units is generally tax-deferred, allowing investors to defer capital gains taxes further.
- Professional management – REITs often have experienced management teams and economies of scale that benefit investors.
- Regular income – Many REITs offer consistent dividend payments, giving investors a steady income.
When considering a DST investment, inquire about potential UPREIT options that may be available in the future. This flexibility provides additional exit strategies and opportunities for portfolio growth.
