DST Risks, Fees, Rules and Restrictions

Investing in a beneficial ownership interest of a Delaware Statutory Trust carries many of the same risks as investing in direct ownership of real estate property. Due to the structure of the DST as a passive ownership entity, a beneficial ownership interest in a DST presents additional consideration that the investor should be aware of. The following considerations should be fully understood when assessing an investor’s suitability for ownership of a Delaware Statutory Trust:

• Lack of liquidity and timing of exit – generally DSTs have a target property hold period ranging from 3 – 10 years. The hold period may differ significantly from the targeted timeline based on market conditions. The investment should be viewed as illiquid while invested in the property. Early exit by the investor for liquidity purposes may not be possible or may be only possible at a significant discount to the trust’s net asset value. 

• Lack of control – owners of a beneficial interest in Delaware Statutory Trust have little control over management decisions and eventual sale of the underlying property. The real estate investment company managing the trust is responsible for all operating decisions. 

• Failure of due diligence and non-compliance – all DSTs offered through Real Estate Transition Solutions are subject to a rigorous due diligence process in which the DST sponsors are thoroughly reviewed, as are each individual DST offerings. However, failure to identify an issue may result in mismanagement or non-compliance in adhering to the IRS criteria established for a DST to qualify for tax-deferred exchange treatment. 

• Loan modifications may not be possible – due to the structure of a DST, restructuring the financing of the property may not be possible without changing the legal ownership structure. DSTs mitigate this issue by utilizing master lease agreements between the trust and the real estate investment company.

• Projected cash flow may not be consistent with actual performance – as with any real estate property investment, cash flow levels are subject to market, economic, tenant and location risk. Projected cash flows are typically conservative in nature; however, they are not guaranteed. 

• Projected appreciation may not occur – as with any real estate property investment, asset appreciation is subject to market, economic, tenant and location risk. Appreciation may not occur at the end of the trust’s property holding period or the holding period may be extended beyond stated projections. 

• Interest rate risk – the value of real estate is heavily impacted by the current interest rate environment. Changes in current interest rates may increase uncertainty surrounding financing, leasing and appreciation.

• Regulatory risk – DSTs are susceptible to changes in the IRS’s treatment of tax-deferred exchanges. Furthermore, the advantages of ownership of a beneficial interest in a DST for estate planning purposes may be eliminated based on changes in the Internal Revenue Code. 

• DST management costs and fees – DST structure provides for management fees to the sponsoring real estate investment company. These fees, while thoroughly disclosed upfront could serve to reduce cash flow levels below that of the stated projections. 

If you are interested in learning more about DST ownership as a tax-deferral strategy, I encourage you to download our free guide, “Investing in Delaware Statutory Trusts”. To speak to one of our 1031 Exchange professionals or to schedule a complimentary consultation, call us at 206-686-2211.

Roger W. Bowlin – Founding Partner of Real Estate Transition Solutions, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. If you have questions relating to your investment property ownership, please email info@re-transition.com or call (206) 686-2211.