A Delaware Statutory Trust or a DST is a privately held trust responsible for buying, managing, administering, and selling real estate properties. DSTs are formed by filing a Certificate of Trust with the Delaware Division of Corporations and governed by Chapter 38, Part V-Title 12 of the annotated Delaware Code. DST investors enjoy fractional ownership in large institutional-grade properties. The amount of profit that a DST investor earns is directly proportional to their investment.
Understanding DST investment structure –
- Unlike TIC properties with up to 35 owners, there is no limitation on the number of investors a DST could possess. A DST may have a hundred or even more investors.
- A DST investment may start from as low as $100K due to its large structure.
- DSTs enable small investors to acquire large institutional-grade properties along with other investors, which otherwise they may not be able to purchase individually.
- DST investors don’t have voting rights.
- 1031 exchange investors can invest their proceeds into a DST and complete their exchange.
- Accredited investors can invest in DSTs with the help of a real estate broker or agent.
- DST investors don’t receive the title to the property.
Some limitations of DST investment –
- No new contribution – A DST can’t receive contributions from its current or new beneficiaries once the offering is closed.
- No renegotiation on existing terms – The trustee can’t renegotiate the terms of the existing loans. Neither can it borrow new funds from any lender.
- Limitation on the reserves – Any cash held during distribution dates can only be invested for paying off short-term debts.
- Can’t reinvest the proceeds – The trustee isn’t allowed to reinvest the proceeds obtained from the sale of its real estate.
- No extra reserves – It’s mandatory that all cash held during the distribution dates, other than necessary reserves, is divided among the beneficiaries regularly.
- No new leases – The trustee isn’t allowed to enter into new leases.
- Limited capital expenditure – The trustee is only allowed to make limited capital expenditure related to (a) normal repair and maintenance (b) non-structural capital improvements, and (c) those required by the law.
NNN Investment comes with no management responsibilities…
A triple net lease, also written as NNN lease, is usually a single-tenant arrangement that removes the burden of property management from an investor’s shoulders by asking the tenant to pay all required property expenses along with the base rent. What we see in a standard or gross lease doesn’t follow in the NNN lease. For example, in a standard or gross the tenant only pays the property rent, a part of which is then invested by the investor on property’s maintenance (if required) as well as for paying property expenses such as insurance fee, property taxes, etc. On the other hand, a NNN lease requires the tenant to pay these property bills along with the base rent. In addition, a NNN lease requires a long-term commitment and may lock the tenant for a period of 10-15 years. As a result, NNN investors enjoy a regular flow of income for a long time.
NNN Tenants cover three major property expenses – insurance fee, property taxes, and maintenance cost
The reason why NNN lease is called so is that it includes all three big property expenses, including property taxes, insurance fees, and maintenance costs. These expenses are together known as the three nets, and hence the lease agreement is called a triple net lease. However, there are other types of Net leases as well that may not require the tenant to pay all these expenses.
Double Net Lease – A double net or NN lease is also a single-tenant arrangement, but doesn’t require the tenant to pay all three property expenses. Instead, NN tenants are only responsible for paying any two property expenses, which generally are property taxes and insurance fees. Whereas, the investor still looks after the maintenance of the property.
Single Net Lease – A single net lease, also written as a Net lease, requires the tenant to pay one property expense along with the base rent. The tenant could either pay the insurance fee or property taxes, whereas the investor takes care of the other two expenses.
Note: As NNN tenants are also responsible for paying property expenses, the rent under a NNN lease is slightly less than that under a standard or gross lease.
Why investors use NNN investment to close their 1031 Exchange?
- Stability – Every investor seeks stability. NNN investment requires a long-term commitment from tenants that ensures a regular flow of income for investors until the lease ends. The majority of NNN tenants are big established companies, which means there is barely any risk of default.
- Increased cash flow – Exchanging an old investment property for a NNN property can surely increase the flow of income. In case your investment property is not generating as much revenue as it should be or if it has already depreciated, you can swap it with a NNN property using a 1031 exchange.
- Consolidation – Another advantage of using a 1031 exchange is that you can consolidate different investment properties. Consolidation can make your life easier as you don’t have to be at different locations for managing different properties.
- Diversification – Investors use 1031 exchange to diversify their investment portfolio as it gives them an opportunity to invest in properties of different grades or classes. Moreover, you can also use a 1031 exchange for geographical diversification.
- Management Relief – NNN investment removes the burden of property management from an investor’s shoulders. As the tenant is responsible for paying property expenses, NNN investors enjoy a regular flow of income without any liabilities.
- Asset preservation – Investors tend to preserve assets or properties for their heirs or relatives. 1031 exchange is a good way to keep your investment running for as long as you want. Swapping older properties with newer ones eliminates the possibilities of depreciation.
Finding NNN 1031 exchange properties requires some research.
What you need to have to make the most out of your NNN investment is an authentic NNN tenant list. There are a few real estate companies that provide NNN tenant lists to investors (you may have to pay for it). Another way is to surf the internet until you drop. Possibilities are very rare that you’ll find the NNN tenant list this way. However, if you reach out to an experienced advisor or NNN expert, they can help you in getting your NNN tenant list (free of cost).