Understanding DST 1031 Exchanges, Part 3
During the 1990s and early 2000s, 1031 exchange investors who exchanged properties for partial ownership in large, high-valued replacement properties engaged in the Tenant-In-Common (TIC) structure.
In contradiction to a DST (Delaware Statutory Trust), each TIC investor had deeded title of the property. Though this was a successful investment model, it had many disadvantages for investors. After the economic slowdown in 2008, the reputation of TICs diminished significantly, and DSTs took over as a popular choice.
1. DSTs do not need unanimous owner approval.
What makes DSTs a better choice is that the unanimous approval of the individual owners (investors) is not needed to deal with unfavorable developments. This prevents any decision making delays in case one investor fails to respond or denies the proposed action.
2. DSTs are easier to finance and are less expensive.
Another benefit of the DST structure is that the lender is the only borrower and deals with the trust independently, making it simpler and less expensive to get financing. For a TIC arrangement, the lender is expected to allow up to 35 different borrowers. Because the DST secures the loan, there is no need for the individual DST investors to qualify, and their partnership in the trust does not influence their credit rating.
3. DSTs doesn’t need to sign loan carve-outs.
In a DST, the investor’s only right is to receive distributions. They have no voting authority concerning the operation of the property, eliminating the investor fraud carve-outs. The lender looks only to the signatory/sponsor trustee for these carve-outs from the non-recourse terms of the loan.
4. DSTs grant limited personal liability.
DST investors have limited liability to their assets due to the bankruptcy-remote terms of the DST. This means that if the trust crashes and goes into bankruptcy, the most an investor would likely lose is their investment in the trust. Any creditor of the trust, or the lender, would be restricted by provisions in the trust from approaching the other assets of the investors. Therefore, no LLC entity is necessary to operate a DST investment.
5. DST investors do not need to maintain an LLC.
To restrict personal liability, TIC investors need to maintain an LLC (Limited Liability Company), which can induce set up, dissolution, and annual fees. DST investors do not need to keep an LLC to safeguard their assets, and, therefore, do not end up paying state filing fees that might dilute cash flows.
6. DST investments have no closing costs.
DST investors ideally have no closing costs attached to the formation of a single-member LLC as in a TIC structure, saving around $5000 each investment.
7. DSTs require low minimum investments.
A private placement DST structure may have up to 499 investors (in contrast to the 35-investor limitation of a TIC), the minimum investment needed for DST are significantly lower. With DST cash investments can be as low as $25,000 and for a 1031 exchange minimum investment is around $100,000.
8. DSTs do not have trustee term time limits.
The signatory trustee of a DST is usually the sponsor of the private placement offering or one of the affiliates. Unlike a TIC investment, there is no limitation on the tenure of trusteeship or that of the property manager. This assures the lender of the sponsor’s presence in operating the property.
Join us for a profitable 1031 Exchange in DSTs.
When you invest in a DST, you obtain a fractional ownership of debt and equity, fulfilling your exchange requirements. You will get a 1099 for ordinary income, 1098 allowing for mortgage interest write-off, and a profit & loss statement or an operating statement for depreciation. With a DST, investors can still avail the perks of owning real estate without facing the day-to-day responsibilities of actively managing real estate. Call or email us today to learn more about DSTs and how they may fit within your investment portfolio. Call at 888-395-0046, or email us at firstname.lastname@example.org.