Delaware Statutory Trust Relations & Portfolios—What? Who? Where? When? Why? …And How?

A commercial building used to demonstrate the various Delaware statutory trust relationships

By: Jason Salmon, Senior Vice President – Kay Properties and Investments, LLC

A DST is a Delaware Statutory Trust. Further, the DST structure has been adopted as a form of ownership used to allow private investors to own fractional interests in institutional real estate.

Further still, this form of passive real estate ownership affords investors the opportunity to diversify* their real estate holdings by geography, property sector and asset manager. Moreover, DSTs qualify as “like-kind” 1031 exchange property, providing investors the opportunity to utilize this tax-deferred exchange upon both the entry into the property as well as the eventual exit upon sale of the DST.

In order to invest in DST real estate, an individual or entity must be an accredited investor. If so, an investor can work with Kay Properties and Investments to review offerings from multiple real estate asset managers–or sponsor firms. These sponsors generally have between one and five DSTs out in the market at any given time. Kay Properties is a DST brokerage firm whereby we work with many different real estate sponsor companies which gives our clients an opportunity to invest in a diversified DST portfolio that is right for the client’s situation, goals and objectives.

Sponsor companies are firms that find institutional real estate opportunities, conduct underwriting and due-diligence, acquire the real estate, place it into the DST structure and then make fractional DST ownership available to investors. Therefore, the financial reporting by sponsors is one of the key aspects of the Delaware Statutory Trust Investor Relations.

The founder of Kay Properties, Dwight Kay, has been involved in over $7 Billion dollars of DST properties throughout his career and one of his main pieces of advice to investors is to never invest based on who the sponsor company alone is but to always invest based on the merits of the real estate. The real estate should always come first, and then from there, an evaluation of the sponsor company.

Delaware Statutory Trust Investor Relations

How DST ownership structures work is that investors purchase fractional shares of institutional grade real estate or commercial properties such as, net-leased retail centers, industrial or commercial buildings, self-storage facilities, medical office buildings, multi-family apartment complexes, and others. Such properties may otherwise be out of reach of individual investors.

There are many facets to the DST ownership structure among which Delaware Statutory Trust investor relations is a vital one. How it works is that a sponsor forms the DST and also secures financing on a prior basis. A sponsor evaluates several assets based on their profitability with the help of financial modeling, reporting and analysis, and other advanced methods. Then they select the properties to be included as part of the trust. Besides the establishment of the DST and acquiring the financing for it, they’re also tasked with the management of the properties within. However, they can outsource the management or day-to-day supervision duties to a third party, if they choose to do so. However sponsors are responsible for packaging the DST offerings and updating investors with information of how the properties or assets within the DST are performing financially.

As such, the Delaware Statutory Trust investor relations with sponsors are similar to those between the senior management and stakeholders of a company. DST investors are passive investors with fractional ownership of the trust. On the other hand, sponsors are responsible for buying and selling assets for the trust and have full control of the trust. Another significant aspect of Delaware Statutory Trust investor relations is that sponsors are required to provide investors with monthly or quarterly financial documents.

Where are DST properties?

DST properties are located all over the country. Kay Properties and Investments often has between 20 and 30 separate DST offerings in which our client may participate—so there are plenty of location options.

When should a DST investment be considered?

DSTs can be a great way to make direct cash investments anytime there is interest in buying real estate, but with passive ownership. DSTs are especially useful when an investor is in or could have an upcoming 1031 exchange. Closing on DST real estate is much different than having to find replacement properties, conducting due-diligence and negotiating with sellers, and the sellers actually following through if the property even passes muster. DSTs properties can usually be closed on in 3-5 business days.

For those that require debt for their 1031 exchange…DSTs either do, or do not come with financing in place. If there is the use of leverage, the debt is not recourse to the investor. Varying levels of financing can be blended through diversification in order to achieve the loan-to-value requirement for each investor that we work with. For investors not wanting the risks associated with using debt in real estate investing they would be wise to consider all-cash/debt-free DST properties. Kay Properties often has access to debt free properties available through multiple real estate sponsor companies.

Why DSTs?

Buying real estate is a way of investing that is non-correlated to the stock market; and DSTs can be a viable alternative to putting all your eggs in one basket. Each DST can be comprised of a single asset or it can contain multiple properties. Notwithstanding, the flexibility for an investor to be able to create their own portfolio of real estate, focusing on asset classes that they understand and believe in, or diversifying across multiple property types, or utilizing varying degrees of leverage to achieve a targeted, blended end-result—all are a possibility with DSTs.

It’s a passive investment. With DSTs, investors do not have to deal with day-to-day real estate management responsibilities. Certain forms of real estate ownership – such as Triple Net Leased Properties aka NNN, can have passive qualities, but what about being an asset manager? Equally important and perhaps more important to buying right and getting a good deal, is the ability and wherewithal to be able to sell appropriately and/or renegotiate with tenants when needed.

Many of the Delaware Statutory Trust sponsor firms that we work with have real estate assets under management ranging from $500 million to billions of dollars. They have acquisitions teams that source, negotiate and underwrite institutional real estate deals in which our clients have the opportunity to invest. Their investor relations departments correspond with clients and deliver end-of-year tax reporting. Additionally, they relay news of property-related events, including notice of an upcoming sale whereby the investors have the option to do another 1031 exchange into more DST properties with Kay Properties’ guidance or purchase any other type of investment real estate on their own.

How?

Continue to work with Kay Properties and Investments to determine if DSTs make sense for you as well as stay posted on recent updates, articles, new DST inventory, etc. at the Kay Properties website and blog: www.kpi1031.com

*Diversification does not guarantee profits or protect against losses.