Most DST investments are assets that your run-of-the-mill, small to mid-sized accredited investors* could not otherwise afford to purchase on their own. However, by pooling money with other investors, they are now able to acquire this type of asset.
Investors who are familiar with the Tenants In Common (TIC) investment strategy may see some similarities in the DST concept; however, it is important to understand the differences between the two concepts. While a TIC may have up to 35 investors, each owning an undivided, pro-rata share of title to the property, a Delaware Statutory Trust may have up to 100 investors (sometimes more), with each investor owning a beneficial interest in the trust which, in turn, owns the underlying asset.
Differences Between Delaware Statutory Trusts and Tenants in Common Ownership
There are two benefits that the Delaware Statutory Trust structure offers over the Tenants in Common concept. One is that because a DST is not limited to 35 investors, the minimum investment may be much lower, sometimes in the $100,000 range. The second major advantage is that in a Delaware Statutory Trust, the lender makes only one loan to one borrower, the sponsor of the DST.
In a Tenants in Common investment the lender can fund up to 35 separate loans, one to each investor. In times of tight money, however, the Delaware Statutory Trust gives the lenders greater security because the lender has fully qualified the sponsor, who is the underlying responsible party.
Be aware that the greater number of investors, plus the larger number of shares may or may not protect your investment. Careful scrutiny of the controlling partner / sponsor is advised. There are a lot of crooks in this business.
Delaware Statutory Trust Possess Risks
Delaware Statutory Trusts are not without their risks. As with any type of real estate investment, investors may be subject to high vacancy rates and loan defaults. DSTs are also not sole-ownership investments. A Delaware Statutory Trust is a more passive investment made up of multiple owners and ultimately controlled by the master tenant (the sponsor). It is important for investors who may be considering the Delaware Statutory Trust strategy to consult with an experienced Delaware Statutory Trust professional, and to obtain competent legal and tax advice.
Upon thorough evaluation, the Delaware Statutory Trust structure may be a viable investment alternative for qualified real estate investors. But only your tax adviser and lawyer can tell you if it's right for you.
*Accredited Investors are individuals whose net worth is in excess of $1 million and / or earn annual income of $200,000. Accreditation for entities means the entity's assets are in excess of $5 million and / or each entity member must be an accredited investor as an individual.
Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC.
This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes. Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.
