Delaware Statutory Trusts: A Potential Solution for the Weary Landlord

 

In her recent interview with HFO-TV, Toija explains the basics of Delaware Statutory Trusts, which are gaining some popularity among multifamily owners.

by Toija Beutler, Attorney/Manager, Beutler Exchange Group

After the trauma of the last couple of years, there are a lot of weary landlords. COVID-related issues and new landlord-tenant laws have altered the landscape for these folks. While my recommendation would be to hire a property manager, many just want out of multi-family.

One option might be a Delaware Statutory Trust (DST) purchase. The DST is fractional ownership of real estate. Typical properties might be medical office buildings, apartments, a portfolio of pharmacy properties (RiteAid, CVS), sometimes an Amazon distribution center.  

There are many appealing aspects of the DST. First, sponsor companies find the property, obtain the financing and close on the property. They then sell fractional interests to investors.

1. Passive. DST’s are professionally managed by the sponsor. The investor won’t be getting calls in the middle of the night. They just get their fractional share of the lease income.  
   
   
2. Quality Properties. The regulations require these to be passive investments, so they will be Class A, institutional-grade properties, not “value add.”  
   
   
3. Availability. Whenever the investor’s sale closes, they will have multiple options to choose from within the 45-day identification deadline. And there won’t be bidding wars with other investors wanting in on the deal. 
   
   
4. Debt in Place. Investors who need “replacement debt” to satisfy their 1031 are well served by these properties. The debt is already in place and is non-recourse.
   
   
5. Diversification. The investor can pick perhaps two or three DST’s as replacement properties, diversified by product type and state.  
   
   
6. Real Estate Deductions. The DST interest is real estate and reported as such. Therefore, the investor will continue to write off expenses and take depreciation as they would with any property.
   
   
7. Transfer at Death. DST interests will pass to heirs as would any real estate with a step up in the basis.
   
   
8. Liquidity. The regulations don’t permit a refinance of the property, so pulling cash out during the course of the investment can be seen as a negative. (The Investor has no access to the equity until the property is sold. The average hold period is around seven years.) However, many sponsor companies offer a conversion feature.  A couple years out, the property may be contributed to a real estate investment trust (REIT).  At that point, the investor no longer owns real estate. Instead, they own shares in the REIT, which can be sold (taxable) but provide the desired liquidity.
   
   
9. Securities. While the DST is real estate for 1031 exchanges, they are also a security and must be purchased through a licensed financial advisor. Therefore, the Weary Landlord will need to find a financial advisor specializing in this product.

The DST isn’t suitable for everyone, but it can be a viable option for a Weary Landlord looking to exit active management and remain in real estate.