The state of Delaware has a strong history of innovation in protecting the personal wealth of both residents and non-residents through both its corporate laws, and its trust statutes. The state’s work in trust law has helped investors maximize their investment return while protecting it from creditors and saving income tax. In addition, because the Delaware Court of Chancery has exclusive jurisdiction over matters of equity, should a trust dispute ever arise, Delaware also has the system in place to resolve it effectively and justly. Other states have enacted statutes to recognize business trusts, but Delaware was, and remains, the leader in statutory trust entity and continues to outperform other states. Large corporations and wealthy individuals have used Delaware’s advantages to their benefit for years, but investors with small equity are able to reap the benefits of these statutes as well.
Why DSTs Are Important For Small Equity Investors
When investors, small and large, are looking to arrange an asset-backed financing or establishing a titling trust, they need to identify an entity to hold the assets being financed. That entity will be the center for all structured finance transactions.
The simple filing requirements of a Delaware Statutory Trust protect investors. Because the DST certificate shows only the name of the trust and the name and address of the Delaware trustee, the identities of the beneficial owners of the trust can remain private and protected. After a one-time fee due upon filing the certificate of trust, there are no annual fees or additional filing requirements.
While the trust does require a Delaware resident trustee, all management of the trust can be delegated to out of state co-trustees and managers, allowing for flexibility and reducing time and travel requirements for individual investors. Investors can deposit their 1031 exchanges into the DST, or can purchase a DST interest directly.
DSTs allow the parties involved to decide the details of the business relationship, thus giving investors the freedom and flexibility to determine what best meets their needs. Investors are protected from liability because DST members and managers have no personal liability for the debts and obligations of the trust.
DSTs can be structured to be a tax efficient alternative to corporations, as they do not have to be subject to tax at the organizational level.
And finally, DSTs give small equity investors an excellent opportunity to enter into, and benefit from, large commercial real estate transactions that they could not enter into on their own.
A Small Equity Investor Case Study
What does a DST investment look like in the real world? Let’s look at potential investor, Richard Vega, who has set aside $150,000 that he’s looking to invest. He can’t afford to buy a large, quality, commercial property with it, so he instead decides to buys a beneficial interest in Genera Trust. Acme Trust is a DST that recently acquired a large multi-use commercial building in Omaha, which it will then rent to multiple tenants. Vega’s buying ownership of the assets of Genera Trust, rather than the trust itself, and he won’t have to qualify for a loan, or manage the day-to-day issues of the tenants, because that will all be handled by the managing trustee.
Genera Trust will determine the number of additional investors (up to 100 under Delaware law), but unlike a Tenant-in-Common structure, the lender only needs to make one loan to one borrower, which is in this case is Genera’s managing trustee and sponsor. After the building is purchased and tenants are identified and placed, Vega will get a quarterly distribution throughout the life of the trust, without ever having to worry about collecting a rent check or looking for a tenant.
Small equity investors who are interested in growth opportunities should consider investing in a DST in order to see their equity reach its maximum potential, while protecting personal interests.