3.9.2. Delaware Statutory Trust (DST)
In 2004, the IRS allowed the use of a Delaware Statutory Trust (DST), if it holds real estate, to be party to a 1031 exchange. This ruling permits investors to exchange their property for beneficial interests in the DST, a grantor trust whose characteristics are defined by statute. While the trust will hold title to the investor’s replacement property, the investor is deemed to hold an undivided fractional interest in the trust’s property. This makes it eligible to participate in a 1031 exchange. A sponsoring firm organizes and manages the trust and buys properties under the trust umbrella. The investor never becomes a titled owner and has no managerial control or oversight.
The Delaware Statutory Trust (Delaware because these trusts are most often formed under Delaware law) has almost completely supplanted the tenants in common enterprise.
Recall that with a grantor trust, the trustor is also the trustee, meaning that the sponsor of the trust is also the manager of trust assets. The beneficiaries are the passive investors. The sponsor/trustee may also be a beneficiary, if it owns trust assets. To qualify as a Delaware Statutory Trust, a trustee cannot:
• accept contributions from current or new investors after the offering is closed
• renegotiate terms of existing loans or borrow new funds
• sell real estate and use the proceeds to acquire new real estate
• make material decisions or engage in the business except to make minor repairs
• retain cash other than necessary reserves or invest cash in other than short-term debt
The trustee can only receive distributions.
From a sponsor’s perspective, a DST has several advantages over a TIC. Assume, for example, that the trust wishes to leverage the purchase of trust property by securing a loan. Since the DST holds title to the property, a loan will only have one borrower. With up to 35 co-owners, a TIC will require up to 35 borrowers