Financing Essentials of a Delaware Statutory Trust

Unlike other methods of real estate investing, a Delaware Statutory Trust (DST) offers several unique benefits with regards to financing and liability with regards to investors. First, use of a DST greatly simplifies the process for financing securitized real estate, and usually entitles investors to very competitive interest rates often reserved only for large financial institutions.

How is this possible? Because with a DST, the trust itself is the sole borrower and owns 100% of the fee interest in the property. This eliminates the need to vet every individual borrower, making a DST far more appealing to lenders than, say, a Tenancy in Common where up to 35 individual owners would have to be scrutinized for credit worthiness.

Another financing essential, because the individual investors have no say in the day-to-day operations, means that investors usually won’t be required to sign any non-recourse loan carve-outs. This means the lender will deal exclusively with the trust when it comes to carve-outs, which will be executed by the DST trustee. This means that individual investors are not personally liable for loan repayment. If the DST defaults, the individual investors’ personal credit will not be affected, either.

Likewise, a well-structured DST will utilize a sponsor with a proven track record of performance. This brings peace of mind to lenders who can then expect that the DST will be well-managed. DSTs also contains special purpose entity provisions that prevent creditors from reaching the DST property itself, making the DST bankruptcy remote. Another plus in the eyes of a lender, since this means the lender can more easily foreclose on their own first mortgage if the need arises.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.