How do DST ownership structures work in real estate?

What is a DST Structure?

A Delaware Statutory Trust (DST) is a legal entity used in real estate investment, where investors buy fractional interests in the trust, rather than owning the property directly. Managed by trustees, the DST handles all property decisions, offering investors limited liability and potential tax benefits like deferral of capital gains through 1031 exchanges. They also involve risks such as lack of liquidity, reliance on management, and market volatility.

How do DST Ownership Structures Work?

Here's how DST ownership structures typically work in the context of real estate:

1. Formation of the DST: A sponsor or syndicator creates a DST to hold real estate assets. The DST is a separate legal entity and can own, manage, and sell real estate just like an individual or a corporation.
2. Investor Participation: Investors can buy beneficial interests in the DST. These interests represent a share of the ownership in the DST's property. Investors in a DST do not own the real estate directly but have a fractional interest in the trust that owns the property.
3. Limited Liability: Investors in a DST have limited liability, which means their personal assets are generally protected from the liabilities of the trust. Their risk is limited to the amount they have invested in the DST.
4. Management and Control: The DST is managed by trustees who make decisions about the property, including leasing, maintenance, and eventual sale. Investors typically have no control over these decisions, which differentiates DSTs from other types of real estate partnerships or LLCs.
5. Financing and Loans: The DST can borrow money and take out mortgages on its properties. However, loan agreements often restrict the DST's flexibility in managing the property, a concept known as "springing recourse."
6. Tax Benefits: One of the main attractions of DSTs is the potential for tax deferral through a 1031 exchange. Investors can roll the proceeds from the sale of a property into a DST without immediately paying capital gains taxes.
7. Distribution of Income and Proceeds: The income generated from the property (like rent) and proceeds from any sale of the property are distributed to investors according to their share of beneficial interest in the DST.
8. Term and Dissolution: DSTs typically have a predetermined term after which the property is sold and the trust is dissolved. The proceeds from the sale are then distributed to the investors.

DSTs are particularly popular among investors seeking to diversify their real estate portfolios and those looking for a passive investment vehicle. However, like all investments, DSTs come with risks, including lack of liquidity, reliance on the sponsor for management, and market risks associated with real estate. It's important for investors to thoroughly understand these risks and consider their own investment objectives before investing in a DST.