A Delaware statutory trust, or DST, is a viable option for an individual investor looking for a 1031 exchange-eligible investment (since IRS approval in 2004). DST properties allow for multiple owners, less personal development and research, and fewer property management responsibilities. Once only available to larger corporate bodies, a DST property now offers an attractive investment alternative when considering options for a 1031 exchange.
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Why You Should Consider a Triple Net Lease
Triple net (NNN) leases are a popular real estate leasing option – for good reason. Within the structure of a triple net lease, the lessee takes on all responsibilities of a property from a property owner, including paying property taxes. A triple net property creates a lighter load of responsibility for the owner and more freedom for the lessee. Before considering whether triple net real estate is right for you as an investor, it’s important to understand the ins and outs of the triple net investment.
What is a DST property?
Without exception, DST properties are institutional-grade commercial properties. Examples include office buildings, large apartment complexes, shopping centers and malls. A typical DST property is valued anywhere between $5-50 million dollars, is owned by numerous investors and held by a third-party real estate developer. DST properties are considered DST investments.
Why make a DST investment?
The benefits of a DST structured property investment are that much of the research on projected gains and risks have been researched and completed by a property sponsor. A property sponsor is typically a real estate developer who holds the deed for the property and has prepared a portfolio informing potential trustees on essential information such as demographics of the area, financial projections, tenant profiles, profit/risk factors and more. Additional supporting documentation might include third-party appraisal and environmental reports. Potential investors find this third-party due diligence an attractive element of a DST structured property investment. Additional particular advantages of a DST investment include easier exit strategies for investors, provided liability protections (no need for an LLC), and increased diversification options within the standard 45-day 1031 exchange window.
What are the risks with DST investments?
In order to lessen overall risks of investing in a DST property, locating a real estate developer with a proven track record and DST portfolio is the most important element of the DST investment. DST investments are very much passive investments. This means that investors are not ‘hands on’ with the property. A DST property investment may not be your preferred choice if you favor hands-on property management of real estate investing. It is important for investors to understand the role of all parties you are working with and perform the necessary research to locate an experienced property sponsor. An offering document should also give details on a property sponsor’s past performance and track record. Because a DST investment is usually held from 2-10 years, it is important to consider the term of the trust's holdings. Enter into a DST property investment knowing that finances will be held for a specific length of time.
In contrast to a traditional title and loan holding real estate investment, a DST investment allows an investor to form a legal trust with other interested parties who are defined as investors also. This means investors are not actual owners of the physical property, they simply hold a share of interest in the beneficial DST investment trust. A limitless number of owners can enter into a trust with this type of DST investment structure. The benefits are trustees have more flexibility in handling, less liability concerns, and the opportunity to invest money with a more experienced and larger real estate developer that potentially result in a larger return on the DST investment. Within the context of a 1031 exchange, a DST investment is a convenient option, allowing individual investors to find qualifying exchange properties with less legwork and liability.
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