What Happens at the End of a Delaware Statutory Trust

Delaware Statutory Trusts (DSTs) have a holding period that ranges from as low as two years up to ten years. DST sponsors will generally provide a timeline of its expected life, though this can vary. For example, most DSTs provide a projected hold time of about five to seven years. This provides adequate time for the sponsor to execute their strategy in favor of investors. Another primary reason DST sponsors look to sell within five – seven years is that most offerings with debt have 10-year fixed financing. Since one of the limitations of DSTs is the inability to re-finance, sponsors look to sell well before the loan matures and at a time that is in the best interest of investors. For all-cash offerings, there is greater flexibility to execute their strategy without the pressure of a maturing loan. However, most all-cash offerings still target a range of five – seven years.

As the DST approaches the point of sale, investors are usually given 60 to 90 days or more to prepare for the possibility of closing. As the sponsors are fiduciaries for investors, they don’t need to accept an offer with a short closing time, especially as they want to give investors as much time as possible to prepare for a 1031 exchange. Once the sale is finalized, investors receive all sale proceeds, including any gains from capital appreciation. So, what happens next? This process generally falls into two categories:

 

1. Investors in a Traditional DST

2. Investors in a 721 Up-REIT DST

 

Traditional DST

The first option is relatively straightforward. Upon the sale of the DST’s assets, investors have the same options available as in any direct real estate transaction. These include:

• Exchanging into Another DST

  • Investors can use a 1031 exchange to invest in another DST offering, either with the same or a different sponsor.
  • Currently there are over 50 DST sponsors and roughly 90 offerings across a variety of asset classes including multifamily, industrial, NNN’s, oil & gas, self-storage, manufactured housing, student housing and more.
  • This allows investors to maintain flexibility by being able to adapt to changing market conditions, such as the rise in value of industrial assets over the last ten years, or by their own changing objectives and goals.
  • By continuing to do another 1031 exchange, there is no tax liability.

 

• Exchanging into Direct Real Estate

  • Investors can utilize a 1031 exchange to acquire direct real estate assets, such as multifamily buildings, industrial warehouses, or any other like-kind properties.
  • Some investors might prefer to have direct control of their properties, or they may have been a change in their own circumstance

 

• Cashing Out

• • Investors can opt to cash out and receive the cash directly, which typically involves paying capital gains tax.
  • Investors should consult with tax professionals to plan accordingly with changing rules, laws, and regulations. Potential taxes can include local, state, federal, net investment income tax, depreciation recapture, and more.
  • There are strategies that exist to potentially minimize some of the tax liability.

 

With any 1031 exchange, whether it’s to invest in another DST or direct real estate, investors will need to obtain the services of a qualified intermediary to hold the funds. This is an absolute requirement. If an investor takes possession of the funds at any time, this will trigger a taxable event. An account with a qualified intermediary must be set up before the sale of the property occurs. If you need the services of a qualified intermediary, please contact us and we will provide you with a reputable firm.

 

721 Up-REIT DST

 

The second option is relevant for those investments that offer a 721 Up-REIT. This is typically available with large institutional sponsors such as Cantor Fitzgerald, Apollo, Blue Owl, ExchangeRight, and others. Advisors can let investors know whether a sponsor or offering has a 721 option. This option is available to any investor and investors still must utilize a DST before transitioning into the REIT. There are two types of 721 Up-REIT offerings: those that are optional and those that are mandatory.

• Optional 721 Up-REIT: If the option is available, you can decide whether to transition into the REIT or opt out when the DST is ready to be purchased. If you choose to opt out, you will have the same options as investors in a traditional DST where you can do a 1031 exchange or cash out. If you opt into the REIT, you will trade your ownership interest in the DST for shares in the much larger REIT.
• Mandatory 721 Up-REIT: In a mandatory offering, your DST interest is automatically converted into shares of a larger REIT. For most of these offerings, there’s a 2 to 3-year hold period before transitioning into the REIT. Once inside the REIT, several benefits arise, including increased diversification, enhanced income, and monthly or quarterly liquidity. A significant advantage is the ability to sell shares tax-free up to your remaining cost basis.

Most investors utilize 721 Up-REIT offerings as a way to maximize safety by investing in REITs with billions of dollars, across a diversity of asset classes and with some of the largest companies in the world. However, one significant drawback is that once inside the REIT, you cannot participate in another 1031 exchange. You can hold shares as long as you wish, but selling beyond your remaining cost basis will trigger a taxable event unless there is a step-up in basis. Again, investors can sell shares on a monthly or quarterly basis according to their needs.

One of the primary advantages of Delaware Statutory Trusts (DSTs) is the ability to access large-scale, institutional grade real estate. Professional management teams handle property maintenance, tenant relationships and overall administration, freeing investors from the time-consuming aspects of property management. DSTs seek to provide preservation of capital, stable predictable income, and long-term growth. These consistent cash flows can be appealing to retirees or those seeking passive income streams. It’s important to understand that DSTs are illiquid investments and it’s crucial to evaluate these strategies to make sure they align with your financial goals and objectives.