Investing in commercial real estate offers investors a wide array of options. The commercial real estate (CRE) sector is vast, encompassing various asset classes, locations, lease structures, and more. One interesting option for investors looking to diversify their portfolios is investing in Delaware Statutory Trusts (DSTs) and Tenants in Common (TIC) properties. In this article, we will specifically explore the differences between traditional commercial real estate investments and DSTs.
Traditional Commercial Real Estate Investments
When entering the world of CRE, many investors choose to purchase a commercial property that aligns with their investment strategies and financial goals. However, this approach requires extensive research and evaluation to ensure the investment meets their objectives. Factors such as investment horizon, cash flows, asset location, cost, and market health all come into play.
Each of these factors can significantly impact the return on investment. For example, the success of certain types of commercial real estate heavily relies on factors like population density, transportation access, and neighborhood appeal. Additionally, investors need to carefully consider their investment timeline and leverage to avoid financial distress.
Navigating these complexities requires experience and knowledge. While some investors thrive in direct property investments, others may find better success with indirect investments like DSTs.
Delaware Statutory Trusts - A Unique Real Estate Investment
DSTs occupy a distinct niche in the real estate investment landscape. Unlike traditional investments, DSTs are considered securities and are regulated by the Financial Industry Regulatory Authority (FINRA). Furthermore, DSTs are passive investments, meaning investors have no control over the management of their investment once they buy in.
So how do DSTs work? DSTs are formed by sponsors, often large real estate companies, with the goal of acquiring and holding commercial real estate properties under trust. Sponsors typically focus on specific sectors of CRE, such as multifamily, senior housing, or hospitality. These assets are often high-value properties that are financially inaccessible to individual investors.
During the offering period, investors pool their money to purchase fractional shares of the trust until the sponsor's capital is fully displaced. Investors receive distributions from the DST according to their share of the trust. Importantly, DST investors do not directly own the real property. Instead, they own shares of the trust, providing legal separation from the assets held under trust.
DST sponsors handle all financial modeling, due diligence, and management of the assets. They also take care of financing, documentation, and tax obligations associated with the properties and the trust itself.
It's worth noting that DSTs have strict guidelines set by the Internal Revenue Service. For example, once formed and funded, DST sponsors cannot renegotiate leases, accept new capital, or reinvest any proceeds generated from the assets held under trust. These guidelines ensure the stability and integrity of DST investments.
The Distinct Traits of DSTs
Delaware Statutory Trusts differ greatly from traditional real estate investments. Traditional investments require investors to have extensive knowledge of various factors that impact asset performance. In contrast, DSTs are pre-packaged investments, with the sponsor completing all the necessary due diligence, financial modeling, and legal documentation.
Additionally, DST investments offer unique benefits for investors looking to complete 1031 exchanges. They allow investors to purchase fractional shares in the exact amounts needed to satisfy exchange requirements and meet strict timelines. However, DST investments tend to be highly illiquid and may have a required holding period of up to 10 years.
To fully understand the potential benefits and tax treatment associated with direct property ownership or DST investments, it is advisable to consult with a certified tax professional. They can provide personalized guidance based on your investment goals.
In conclusion, DSTs are a distinctive option for investors seeking exposure to commercial real estate. With their pre-packaged nature and legal separation from assets, they provide an alternative to the complexities of direct property investments. Understanding the differences and consulting with professionals can help investors make informed decisions to drive their investment success.
