A Delaware Statutory Trust (“DST”) is the holder of the title for the property to be purchased by fractional investors. The investors purchase beneficial interests in the trust, which owns the real property.

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This structure solved some of the management problems inherent in the tenant-in-common (TIC) format.  DST’s qualify for 1031exchange because it is a trust, which is a disregarded entity for tax purposes. The owners of the DST are considered to own the assets of the DST.  IRS Revenue Ruling 2004-86 was issued on July 20, 2004 and it is used by most as a guide of how DST investments should be structured to qualify for 1031.

The revenue ruling has seven major requirements:

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1. Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries;

2. The Trustee cannot renegotiate the terms of the existing loans nor can it borrow any new funds from any party;

3. The Trustee cannot reinvest the proceeds from the sale of its real estate;

4. The trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements and (c) those required by law;

5. Any cash held between distribution dates can only be invested in short term debt obligations;

6. All cash, other than necessary reserves, must be distributed on a current basis; and

7. The trustee cannot enter into new leases or renegotiate the current lease.

For the DST to maintain its trust status, it must be a passive entity.  Certain property types such as office buildings, retail centers, apartments and multi-tenant industrial require the sponsor/operator of the DST investment offering to Master Lease the property from the DST.  These properties require too much operational and leasing activity for the DST to directly manage the activities of the property.  Usually only single net leased properties whereby the tenant is responsible of all maintenance, taxes, insurance, expenses and capital improvements do not require a Master Lease.

The DST is a single entity and for loan purposes the DST is one borrower.  The beneficial interest holders (investors) of the DST have no voting rights and the operating and financial decisions are made by the Trustee of the DST (an affiliate of the sponsor), or the Master Tenant (an affiliate of the sponsor).  The loan to purchase the property requires the sponsor company to sign the non-recourse loan guaranty for the property loan.

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The TIC structure has up to 35 direct borrowers, which currently lenders generally do not offer.  Operating and financial decisions are voted on by the TIC owners, by either majority consent or unanimous consent, depending on the type of decision.

Lender Benefits

• Single borrower

• Since the beneficiaries’ only right with respect to the trust is to receive distributions and they have no vote or say in the operation of the property.

• The trustee of the DST will be the sponsor or an affiliate of the sponsor. This provides the investor and the lender comfort that the sponsor will continue operating the property.

Investor Benefits

• Unlike a TIC structured offering, there is no need to set up a single member Limited Liability Company (“LLC”) for each investor. Each investor owns a beneficial interest directly in the DST. The LLC costs from $300 to $5,000 per year to maintain depending on where the property is located and where the investor lives.

• Investors are not direct borrowers under the loan and do not sign non-recourse carve-out guaranties.

• Since there is no voting for property decisions, then a hold out investor which has occurred in a TIC structured investment will not occur.

• While not a deeded interest in the property, a DST beneficiary is permitted to 1031 exchange in and out of the DST property when it is purchased and then later sold.

• The DST can accommodate over 100 investors, which reduces the minimum investment of equity to $25,000 to $100,000 as compared to the TIC structure with no more than 35 investors permitted.

Retail Property Structure and Benefits

The DST structure is suitable for 1031 exchange investors to purchase multi-tenant retail shopping centers and multi-family apartments:

• Multi-tenant means diversification of income from different retail tenant types, sizes and rents and varying multi-family unit sizes

• The vacant units can more readily be leased at market rents

• Lease terms are generally shorter which facilitates the rents adjusting with the market as tenants renew or are replaced.

• Retail leases are usually NNN, meaning the tenant pays the property’s operating expenses, taxes and insurance.

• Multi-tenant apartment expenses are managed by the master tenant and can be reduced or increased with market conditions

Releasing expenses are more predictable for apartments and retail tenants than office and industrial tenants.