Help! DST - Establishing a Delaware Statutory Trust

16 Replies

Anyone have any experience with a establishing a DST (" Delaware Statutory Trust ") or know anyone who does?

A friend of mine has a great syndication deal on an apartment in Arizona, and I want to put my 1031 money into it. BUT the only way to put 1031 money into a DST is through a TIC (which we don't wanna do) or form a DST. BUT the deal is fairly small (2.7M purchase price, 1.2M raise). So I need to find out if I can establish a DST for this deal and can dump my 1031 proceeds into it.  (I've got 9 days left to identify my replacement property... and starting to get nervous!) Help! 

hey @Brandon Turner ! How the heck are you? I'm getting educated on this mee-self.  What's the amount you're trying to place. I assume there's other equity too or your equity is the whole equity stack?

Originally posted by @Brandon Turner :

Anyone have any experience with a establishing a DST (" Delaware Statutory Trust ") or know anyone who does?

A friend of mine has a great syndication deal on an apartment in Arizona, and I want to put my 1031 money into it. BUT the only way to put 1031 money into a DST is through a TIC (which we don't wanna do) or form a DST. BUT the deal is fairly small (2.7M purchase price, 1.2M raise). So I need to find out if I can establish a DST for this deal and can dump my 1031 proceeds into it.

 (I've got 9 days left to identify my replacement property... and starting to get nervous!) Help! 

When I search for DST on BP, 23 people and 10 companies show up. You might wanna directly contact them. :) Good luck.

Brandon I would say the likelihood of this happening is low.

In a TIC model every owner usually has a voting right. I saw lot's of these fail about 70% in the last downturn. Try to get everyone to agree when you need to refinance or dump more cash into a property.

Then the DST became more popular. It has a bunch of rules also. Actually a ton of rules.

You need to speak to Bill Exeter at Exeter 1031 exchange. He has worked on tons of 1031 exchanges over the decades.

Sometimes if you do not 1031 exchange the taxes could eat up half of your gains. You could have state income tax on a sale,medicare tax of about 3.8%, long term capital gains tax, and depreciation recapture. 

If you have carry over unused losses built up that might offset some of the taxes from a failed exchange and reduce the amount.

To make most DST's work they have to be very large in size as fees are made off of putting it together. Typically a syndicator cannot structure a deal like they could with a regular accredited investor that is not a 1031.

I have not done a DST. If a client is a 1031 I help them buy directly to own and I make a commission. If they have regular funds that are not 1031 then I let them know about ways to invest passively with my company.

You could take your funds and put them into a much larger DST but you might not like the returns or period of hold times to get your money back.

Another option is a STNL type property absolute triple net with a long term lease. You could buy say a Dollar General or Pizza Hut, Title Max, Subway,etc. for 1 million and under with 30% down. Cap rates are general 6 to 7's so cash on cash is about 7 to 8 going in.

The KEY is how badly you need this money to work? If you are worth 3 million and 300k the goal is to defer taxes and you have other capital to make more investment then getting amazing yield is not top reason to buy.

If the 300k represents a large part of your net worth then you might need something with much more equity upside and cash flow return. With limited days left you have some hard decisions to make.

You need to fully understand DST'S and TIC's and go in with (eyes wide open) before making a decision like that. You should have 3 choices so could have other back ups. You purchase price needs to be at or higher than your replacement property or you could face boot issues.

Also know that certain proceeds for the 1031 exchange cannot be used for loan expense purposes when buying the replacement property or they become subject to paying tax on the amount used. 

Good luck. No legal advice given.     

don't let the tax tail wag the dog... you have no state income tax in WA and cap gains is low historically .

unless your talking a very large dollar amount.. paying the tax and now having after tax money to go hunting great deals is not a bad thing..

I echo Joel tic or any other investment were you have multiple partners you don't know can get very harry in a wind down or cash call scenario..

but hey your the boss of BP and you got 9 days left I have seen this play many times.. LOL... panic.

don't let that panic cause you to make a inferior investment decision..

or just go buy a nice 40 acre plot up your way with reprod on it and call it a day.. your kids will thank you in 40 years.

@Brandon Turner   I think the problem is going to be that you have already started the 1031 exchange.  Let's ask @Dave Foster   if he thinks it is possible.  Was the property that you sold as part of the 1031 exchange titled in your personal name?

@Brandon Turner   I do not mean to question your knowledge but I read your post again and I got a little concerned you might not know some of the important rules about DSTs.  Here is a link to some good information.

https://apiexchange.com/dst-versus-tic-ownership/

As the link mentions they are better with a single tenant property.

Because of the restrictions on leasing you will have to do something like a long term master lease to another entity. I believe all of that would have to be done in a multi step close. I think a lawyer will tell you that the lease needs to be entered into before the DST takes title in the property.

 I hope this helps.

PS I do not have a huge amount of experience with DSTs.  I just know some of the reasons why I have not been able to use them in the past.

@Michael Biggs , Thanks for the shout out.  @Brandon Turner 's OK for now but I'll bet he's starting to scramble for plan B with only 9 days left to identify.  His exchange requires him to have identified his potential replacements by day 45.  After that the list goes hard so you gotta be very careful what ends up on your list.

Setting up a DST by the end of day 45 might be feasible. But 9 days only to decide how feasible is a sure catalyst for the pucker factor.

I don't know the basis of the bias against a tenants in common ownership for a small project like this. This price point and what sounds like a very few investors would make it a perfect project to take down with a TIC structure - either a 2002-22 safe harbor structure or simply as tenants in common with a master operating entity.

 DSTs are usually best utilized with very large numbers of investors I'll bet the cost to set one up is going to be prohibitive both from a $ and time perspective. 

@Brandon Turner A DST can certainly provide solutions. The biggest sponsor in the DST space is Inland Private Capital, taking up about 40% of the market. I worked for Inland for almost ten years and I’d be happy to connect you with a financial advisor in your area that not only can discuss Inland’s current offerings but others as well. Some of the larger players are Inland, Passco, AEI, Cantor Fitzgerald, Bluerock (just to name a few). Since I was in the Securities world for a significant amount of time I can connect you to a number of wholesalers or financial advisors who can discuss current offering(s). Ultimately, you will need to determine which real estate sector you’d like to invest, where within the US, and if you need to replace debt and from there that would narrow down your sponsors.

You might be able to use a monetized installment sale to save your tax deferral. That would give you time to find deals that make more sense.

Brandon Turner curious as to what you ultimately did. 

Hey @Joel Owens and everyone else! 

Great info here! So - yeah, the DST thing ain't gonna work. It was hard to get anyone to tell me how much it would actually cost, and for other complicated reasons -- it's just a bad idea :)

BUT I did get a property! Two, actually. I probably analyzed 1,000 deals in my 45-day window (and the month leading up to the sale of my last property.) Found two that excited me - and got them both under contract last week, during the last 2 days of my 45-day identification window.  A 24-unit in Cincinnati, and a 49-unit mobile home park near Bangor, Maine. So I'll be sharing more as I get through my due diligence.

Thanks for the help, all! 

Bill Exeter is the expert in this area.  I took a commercial leasing class in los angeles was at least 15 years ago and the instructor was an attorney with a large law firm.  And the expert he says that his firm relied upon for complex 1031 issues was----Bill Exeter.

So he has been the primary expert in this area for a very long time.

But I would  also take seriously those who say just pay the taxes.  Whether you do DSTs or TICs you are out of control---and you never want to be out of control in  your investments.

What you may find is that after two decades of doing deals you will feel that like a rat on a treadmill---forced into bigger and bigger deals (1031 requires equal or greater value.)  At that point figuring out what you owe won't be at all simple.

The other thing is that you stuck in a grossly overvalued market---I don't know a single asset class (whether commercial residential or otherwise) that isn't overvalued by 1/3 or more----so what if instead you take that 1/3 "fluff factor" and put it into paying taxes?

Do you ever plan on retiring?    If you want to work yourself to death, then by all means 1031 at every opportunity.

Bill Exeter is the expert in this area.  I took a commercial leasing class in los angeles 15 years ago (or longer---I can't exactly recall) and the instructor was an attorney with a large LA law firm.  And the expert he says that his firm relied upon for complex 1031 issues for commercial transactions was----Bill Exeter.  (And No, I am not affiliated with them, but I have known them a long time).

So Bill Exeter has been the primary expert in this area for a very long time.

But I would also take seriously those who say just pay the taxes. Whether you do DSTs or TICs you are out of control---and you never want to be out of control in your investments. I also seem to recall that a DST is like a roach motel---once investors check into a DST you can't check out---or 1031 beyond it. (Confirm that with Exeter, but that is my recollection).

Have you ever tried to do due diligence on a DST /TIC? Good luck with that.

What you may find is that after two decades of doing deals you will feel that like a rat on a treadmill---forced into bigger and bigger deals (1031 requires equal or greater value in each succeeding transaction.)  At that point, figuring out what you owe won't be at all simple.

The other thing is that you are stuck in a grossly overvalued market---I don't know a single asset class (whether that is commercial residential or otherwise) that isn't overvalued by 1/3 or more.  So what if instead of doing a 1031 you take that 1/3 "fluff factor" and put it into paying taxes?

Also, do you ever plan on retiring?    If you want to work yourself to death, then by all means 1031 at every opportunity.

I would not make the decision to 1031 an inflexible one---if there were still deals to be had in this market, I might feel differently.  But I really, really don't.  BTW, most investors who are faced with their first 1031 exchange usually screw up----that is pretty much par for the course---they lose their money and/or end up with a problem asset only because they have only 45 days to make the choice in a grossly inflated market.  And once you buy a commercial property that is a problem asset that could take a decade (or longer) to get rid of it.   

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Remember, it's a 45 day window to IDENTIFY a property and 180 days to CLOSE on that property.  Also, it is critical to work with a QI that can help make sure your t's are crossed and i's are dotted.  It is my understanding that the way to "identify" a property does not have a clear definition.  Would writing it down on a napkin satisfy the identification?  I'm not sure. Ask your QI.

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