Delaware Statutory Trusts (DSTs)

1) Structure:

A DST is a legally recognized trust set up under Delaware's statutory law. It allows for flexible design in terms of operation and management while providing limited liability to its beneficiaries. DSTs are used primarily in real estate and securitization contexts, where multiple investors pool resources to hold title to one or more income-producing properties. The trustee manages the DST, and beneficiaries have no management rights.

2) Adding or Removing Investors:

Investors can be added or removed typically by selling their beneficial interests in the secondary market. New beneficial interests can also be offered if the trust agreement allows for it, but this is uncommon once the trust is established and funded.

3) Modifications Over Time:

• Can be Done: Adjustments to property management agreements or leasing terms may be made within the limits set by existing loan agreements and the DST's trust agreement.

• Cannot be Done: Beneficiaries cannot make active management decisions or modifications to the trust's held assets, due to restrictions often imposed by lenders and the IRS regulations concerning DSTs used in 1031 exchanges.

4) Transparency:

DSTs provide periodic reporting to beneficiaries regarding financial performance, typically through annual reports and distributions statements. The level of detail in reporting can vary based on the trust agreement and manager.

5) Types of Companies That Use DSTs:

Real estate investment firms and sponsors who organize collective investment schemes in real estate often use DSTs. They are also used by securitization vehicles for pooling loans and other assets.

6) Pros and Cons:

• Pros:

  • Limited personal liability for beneficiaries.

  • Pass-through tax advantage, avoiding double taxation.

  • Can be used in 1031 exchanges to defer capital gains taxes.

• Cons:

  • Lack of liquidity for investors wanting to exit before the trust dissolves.

  • Restricted active management which can hinder response to market changes.

  • Compliance and structuring can be complex and costly.