Why Are DSTs So Appealing To Lenders?

Access to and participation in securitized real estate has been greatly simplified for many investors with the advent of Delaware Statutory Trusts (DST). In a DST, the trust owns 100% of the fee interest in the real estate and is the sole borrower. This usually results in very competitive interest rates, far more favorable than a single investor (or group of individual investors with individual credit ratings) may be able to obtain.

Why do lenders find well-structured DSTs so appealing? Several reasons.

First, the DST sponsor usually has a solid property management reputation, which greatly enhances the likelihood that investment-grade real estate will be properly dealt with. This is in contrast to other forms of joint ownership, where property management tasks may be handled by inexperienced investors.

Second, since the DST is bankruptcy remote – meaning the trust contains provisions that preclude an individual investor’s creditors from reaching the trust assets – lenders can be assured they will be first in line to foreclose on the real estate should that become necessary.

Third, the lender does not need to underwrite every individual DST investor but only the trust itself. This greatly simplifies both a determination of credit-worthiness and the disclosures required under federal law.

Finally, since the individual investors have no say in the day-to-day operations, there is no need to sign any non-recourse loan carve-outs. The lender will deal directly with the trust when it comes to carve-out issues.

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