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What is a Delaware Statutory Trust ?
A Delaware Statutory Trust ( DST) is a separate legal entity created as a trust under Delaware statutory law, which permits a very flexible approach to the design and operation of the entity. Investors in a DST own a pro rata interest in the trust and have the right to receive distributions from the operation, either from rental income, or from the eventual sale of the property. They do not have deeded title to the property. It is the trust itself who has the deed to the property and who, through the signatory trustee, makes the decisions regarding the disposition of the property including its eventual sale. The beneficiaries of the trust have no authority over the day to day handling of the property or the timing and details of its eventual sale. While initially this may seem to be disadvantageous to the investor, this structure actually opens up the possibility for significant advantages.
For the purpose of a 1031 tax deferred exchange, the purchase of a beneficial interest in a DST is treated as a direct interest in real estate, thus satisfying that requirement of IRS Revenue Ruling 2004-86. ( An IRS Ruling, unlike and IRS Revenue Procedure, may be relied upon by other taxpayers in defense of a 1031 exchange position ).
A DST can also be an attractive investment vehicle for investors who are not conducting a 1031 exchange. All the benefits of securitized real estate as well as the financial specifics of the particular DST remain, and in addition, because it is a direct interest in real estate for tax purposes, the investor can conduct a 1031 tax deferred exchange if and when the property is sold, thus beginning the cycle of the tax deferred real estate ownership.
Due to legal limitations and the nature of the DST financing, use of the DST will generally be limited to long term " A " credit triple-net leased properties or properties leased to an affiliate of the sponsor ( a master tenant ) who will operate the property on a triple-net basis ( master lease ).
A Delaware Statutory Trust ( DST ) is in the nature of a unit investment trust or a fixed investment trust. In such a trust, assets, securities, real estate, ect. are purchased for the trust and held until such time as the proceeds are distributed to the invetsors. The trust is not considered a taxable entity and, therefore, all profits, losses, etc. are passed through directly to the investors.
The concept of business trusts, especially those that invlove the holding of property, dates back as early as 16Th century English Common Law. But until the passage of the Delaware Statutory Trust Act in 1988, no legal recognition of statutory trusts existed ( 12 Del. C.3801 et. Seq., ) Under the act, developed on the premise of trust law, statutory trusts were now recognized as their own legal entity, separate from their trustee(s), offering freedom from the corporate law template. Within the tradition of trust law, freedom of contract allows the trustee(s) to structure their entity in a way that is most beneficial to the relationship of all parties and their expertise, while offering liability protection similar to that of a limited liability company or partnership.
Since the year 2000, Delaware Statutory Trust have increasingly been used as a form of tax deferral, asset protection, and balance sheet advantages in real estate, securitization, and mezzanine financing. Finally, for the purpose of owning a " direct interest in real estate " which is critical to qualify for a 1031 exchange, IRS Revenue Ruling 2004-86 opened the way for the DSTs to become the most common ownership structure used by smaller investors to own investments-grade real estate together with other investors. This revenue ruling states that beneficial interest in a DST which owned real estate would be considered a " direct interest in real estate" and thus qualify for a 1031 exchange, assuming of course that all the other requirements are satisfied.
With the additional problems for TIC ownership structures seen during the Great Recession, this trend only strengthened. Today about 90% of all securitized real estate offerings represented by Alta Investment Group for 1031 exchanges are DSTs.