How Safe Is My Investment?
You’re aware of all the benefits of using a Delaware Statutory Trust as an investment vehicle for a 1031 exchange. You’re thrilled at the capital gains tax savings the investment will give you, and relieved that your property management responsibilities will be limited—a professional manager will deal with tenants and maintenance, so you’re not only investing dollars, you’re adding precious hours to your personal time bank at well, and you can use that time however you’d like.
While a DST provides benefits you won’t be able to take advantage of in any other shared ownership investment, there are some risks and compromises you’ll need to consider, as there are with any investment.
How Secure Is My Investment?
A DST investment is an incredibly secure offering for an individual investor. The structure of the trust protects against debt-holders going after individual investors, and individual investors are not allowed to place liens on the property either. With the bankruptcy-remote provision of the trust, investors are shielded from personal liability. Even if the trust fails, the most you can lose is your investment in the trust.
Of course, the investment is in the real estate market, so there is no guarantee as to how much interest and income the trust will generate, or that upon resale, the property value will have increased. Most DSTs look for properties with stable and consistent cash flows, resulting a consistent income stream that will be deposited directly into your account, usually on a monthly basis.
How Liquid Is My Investment?
Liquidity is not a benefit of a DST. As a DST investor, you need to assume that you will remain invested in the trust until the property is sold, typically between a five and ten year investment period. You won’t be able to sell your ownership interest in the trust, so any funds you put there have to remain until the sponsor decides to sell, and every DST offering has its own restrictions on resale.
How Do DST and a Tenant-in-Common (TIC) Compare?
While both a DST and a TIC give investors access to larger commercial properties with a relatively small investment, an advantage of a DST is that the trust is considered a single borrower in the eyes of the lender, making financing easier and less expensive than a TIC, which may have up to 35 borrowers, the IRS limit.
DST investors will give up voting rights, as the sponsor will be responsible for all property-related decisions, including when to sell. This structure is best for investors who want to be hands-free on the daily decisions that affect all property owners. TIC investors have to abide by a Tenant-in-Common Agreement, which outlines how the property will be governed and the procedures for how investors will collectively make decisions. Each TIC owner holds direct title to the property, while DST owners hold a beneficial in the trust that holds the property title.
Because DSTs can have up to 499 investors, compared to TIC’s 35, the minimum investment can be much lower and allows for greater diversity in investment opportunities.