Five Interesting Facts about DSTs

By Alex Madden, Vice President with Kay Properties and Investments

There is a lot to read and learn about DSTs and 1031 exchanges. After speaking with many investors they are often interested to learn about these five niche DST facts:

DST Fact Number 1:  IRS Revenue Ruling 2004-86: DSTs had been used for 1031 exchanges for many years prior to the IRS Revenue Ruling in 2004, but after ruling 2004-86 the IRS provided specific guidance on the use of DSTs in 1031 exchanges, thus providing authorization for DST exchanges when IRS guidance is met. 

DST Fact Number 2:  Springing LLC: Under certain circumstances a DST can be converted into an LLC. Certain limitations are provided on what a DST can, and cannot do. In the event that proactive steps are required to prevent a DST investment from significant loss a DST can convert into a LLC to take steps which a DST cannot. Examples include: renegotiating existing debt, obtaining new financing, and entering into new leases. Once a DST is converted to a LLC it could potentially be treated as a partnership for federal income tax purposes and investors could potentially lose the ability to 1031 exchange their property in the future. Understandably, the Springing LLC is generally regarded as a safety net to potentially protect the property if there was a negative situation.  In the hundreds of DST offerings that Kay Properties has participated in we have only seen the springing LLC utilized by DST sponsor companies a handful of times however it is nice to have it available as a safety net for the property and investors.

DST Fact Number 3:  UPREIT: An umbrella partnership real estate investment trust (UPREIT) uses the 721 Exchange as opposed to the 1031 Exchange to contribute a DST to a REITs operating partnership (OP) on a tax deferred basis in exchange for OP units . This is one possible exit strategy for DSTs. Investors are often provided a choice as to whether they would like to participate in the UPREIT using the 721 exchange, or go their own way using the 1031 exchange into more DSTs or into another property they would manage on their own. 

DST Fact Number 4:  7 Deadly Sins – In order to meet IRS guidance a DST must avoid the following:

  1. No future contributions: Once a DST offering is closed there can be no additional contribution of capital by either current or new investors. 
  2. Restrictions on Debt: The Trustee cannot renegotiate existing debt terms or initiate new secured loans from any party. Some exceptions apply. This is one reason why many investors prefer to invest in debt free DSTs.
  3. No reinvestment of proceeds: The choice of where to reinvest is retained by individual investors when the real estate is sold. 
  4. Required Distributions: With the exception of reserves, all cash received by the DST must be distributed to investors.¹ 
  5. Limited Capital Expenditures: The Trustee may only have capital expenditures to cover the following:
    1. Normal repair and maintenance 
    2. Minor non-structural capital improvements
    3. Those required by law
  6. Restrictions Investing Reserves: Any cash retained by the Trustee for reserves or between distributions dates may only be invested in short-term debt obligations. 
  7. Restrictions on Leases: The Trustee may not renegotiate, or enter into a new lease. Some exceptions apply. 

DST Fact Number 5:  Lower Minimum Investments: Due to the higher number of contributing investors allowed into the DST structure (typically capped at 499 compared to 35 in the TIC 1031 structure) there is typically a lower dollar contribution minimum. Minimum investments are set by the DST sponsor company of the DST investment offering.  The minimum investments are often either $25,000 or $100,000.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

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 read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

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