Delaware Statutory Trust Fees: Delaware Statutory Trust Market Thoughts and Insights

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When an investor is considering a Delaware Statutory Trust, one of the items that should be reviewed is the upfront allotment of fees. This article gives a brief description of the upfront fees that Delaware Statutory Trust properties can contain.

First, DST fees include real estate related fees such as escrow, title, appraisal, environmental report, property condition report, legal, closing costs, etc. These are fees that if an investor would likely to incur if they were to purchase a piece of real estate on their own as well.

Second, capitalized reserves are often included as one of the Delaware Statutory Trust fees. The reserves are typically raised upfront as part of the investors’ equity investment due to one of the restrictions that IRC Revenue Ruling 2004-86 places on DSTs in order to qualify as like-kind 1031 property. This restriction disallows DSTs from having capital calls or borrowing new funds. As a result, the DST sponsor companies will capitalize reserves upfront so that the property potentially has adequate funds needed for any expected and unexpected capital needs throughout the hold period.

DST reserves are typically used for the benefit of the investors in the DST property (investors are the owners of the DST) and most DSTs we have seen return the excess reserves to the DST investors when the property is sold, if unused. As a result of these two items, we often see many investors not including the reserves as a part of the DST fees.

Third, selling commissions and expenses are the DST fees that are used to put together the DST offering and distribute it to investors. The selling commission goes to the registered representative that is advising the investor as to which DST(s) he/she should invest in. Selling commissions are similar to the fees a real estate agent or broker receives when advising a client on a real estate purchase. The broker/dealer or placement agent fee is a fee that goes to the registered representatives broker dealer to compensate them for due diligence and compliance they perform on the offering.

Fourth, organization and offering expenses are the costs that are incurred to create the DST offering documents and materials (legal costs to draft the private placement memorandum (PPM), legal costs to receive a tax opinion from a law firm regarding the offerings qualification as a “like kind” property for 1031 exchange purposes, printing and shipping costs for PPMs and brochures, etc. The organization and offering expenses are essentially the DST fees that are used to create and package a DST offering and make it available to investors.

At Kay Properties we have a tool for our investors built by our DST due diligence analysts that shows our current DST inventory (we typically have 15-30 DST properties available from sponsors like Inland, Passco, Cantor Fitzgerald, AEI, RK Properties, Bluerock, REVA, Capital Square, etc.) fees broken down side by side. This allows investors to compare offerings against each other and understand where they all line up from a fee standpoint. This tool also shows each of the DST properties for sale and where they were bought relative to comparable market sales (all data that Kay Properties due diligence analysts derived from third party appraisals). This can be very useful to investors so that they can compare the DST fees to where the property was purchased.

For example, the offering may have a 10% total DST fee, but using our tool the investors are able to see that the subject DST property was purchased 12% below the average comparable sale in the market according to the third party appraisal. Understanding where a Delaware Statutory Trust sponsor company bought the property compared to the similar market sales is one thing that Kay Properties due diligence analysts love doing. They take this information and compare it to the total DST fees of an offering so as to see a holistic approach where the offering stands on the value chain for investors. We have seen multiple instances where a large portion of the DST fees was offset greatly due to the sponsor buying the property at a fantastic price as compared to the overall market sales. Sponsors that we work with are sometimes able to utilize economies of scale to purchase properties at more attractive price than an individual investor due to the large volume of properties purchased each year, relationships with developers and institutional sellers, and off-market opportunities sourced by their in-house acquisition teams.

If you are interested in receiving our comparative analysis tool to see where different DST sponsor companies and their DST properties stack up from a fee and comparable market sale perspective, please register by visiting www.kpi1031.com or call us at 1(855) 466-5927.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.

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