As 10-year treasuries and interest rates are reaching all-time lows, it’s no surprise that more and more investors are looking to either begin their multifamily careers or are working to scale-up and add to their portfolios. As a result, sales prices continue to rise, cap rates continue to compress and owners of multifamily properties continue to ask the same question: “If I sell now in this high market, what on earth am I going to buy with my 1031 exchange?!” Although this has been a tough question to answer in the past, today our investors are looking to diversify their real estate holdings by passively investing money into alternative opportunities that offer less headaches and fatigue.
DELAWARE STATUTORY TRUST
One option to consider is a Delaware Statutory Trust. Also referred to an DST or Unincorporated Business Trust (UBO), which are legally recognized trusts that can offer replacement property for accredited investors looking to defer their capital gains taxes of the property sale via 1031 exchange. DST’s also can be used to diversify an investor’s portfolio by using straight cash investments.
Delaware Statutory Trusts (DSTs) offer an intriguing option for investors who are looking for properties to complete their 1031 Exchanges. Why DSTs? They do not have the typical responsibilities associated with managing investment properties.
A DST is an “arm chair investment”, or a passive investment opportunity that allows individuals to own fractional shares in institutional grade properties. Some examples of properties that can be structured as DSTs are:
- Portfolio of 10 or 20 storage properties across three states
- Chicago office building
- Portfolio of CVS and Walgreens stores located across the Sunbelt.
- Memphis student housing complex
- Multi-family portfolio in Houston
- Portfolio of Southeast medical office buildings
Your first step would be to contact a trustee of the DST. This is someone who initially purchases the property and takes title. The sponsor of the DST, the party who typically arranges the bank financing and coordinates the management of the property, then structures the transaction and arranges for sale of beneficial interests to individual investors. Though the beneficial interests are considered to be securities under federal securities laws, for purposes of 1031 Exchanges, Revenue Ruling 2004-86, states that a beneficial interest in a DST is considered “like-kind” real estate.
Benefits of DST Ownership:
- DSTs can offer higher quality, investment-grade assets, such as high-rise office buildings, that are typically only available to large institutions.
- They provide investors with current income.
- Investors have no management or day-to-day operation responsibilities. DSTs presents the same benefits and risks that an investor would receive as a single large-scale investment property owner, but without the management responsibility and cost.
- The debt is non-recourse, which means that in the event of a default, the DST investor is not personally liable.
Concluding, a DST is not for an investor who wishes to invest in property for a short period since DST investments are typically designed for a holding period of two years or more. Additionally, DSTs are designed for “accredited investors” which are often higher net worth individuals as defined by the U.S. Security and Exchange Commission (SEC).
About the author:
Sean Reynolds is a Managing Director with Greystone | Investment Sales Group in Dallas, TX. If you want to learn more about our Off-Market Opportunities, Multi-Family Listings, Land Sale Listings, Property Valuations, Debt Platform, or meet for coffee to exchange value-add ideas, contact our office:
Greystone Investment Sales Group
6320 LBJ Freeway, Suite 228, Dallas, TX, 75240