1031 Delaware Statutory Trust (DST) Attorneys
If you are concerned about investment losses in a DST 1031, the securities attorneys at the White Law Group may be able to help you.
A Delaware Statutory Trust (DST) is a legally recognized trust that is set up for the purpose of business, but not necessarily in the U.S. state of Delaware.
Investors seeking to defer paying capital gains taxes on property often do so using §1031 of the Internal Revenue Code. Under §1031, an investor may defer paying capital gain taxes on property when they purchase “like kind” property within 45 days of selling the original property.
Traditionally, investors have taken this route by way of tenant in common investments (or TICs). However, recently a similar structured investment called a Delaware Statutory Trust (or DST) has become popular with investors and while there are a lot of similarities between TICs and DSTs in form and structure, there are some important differences.
Delaware Statutory Trusts (DSTs) are typically formed as private agreements for real property. DST Investments are generally offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings.
DSTs are similar to tenants-in-common (TIC) investments when it comes to benefits, risks, and structure.
The idea behind the TIC and DST property ownership structure is that it allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial properties along with other investors, not as limited partners, but as individual owners within a Trust.
Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. The DST ownership option essentially offers the same benefits and risks that an investor would receive as a single large-scale investment property owner, but without the management responsibility.
What is the Difference Between a DST and a TIC?
A tenancy-in-common is a type of property ownership where multiple people share ownership of a certain property, while a Delaware Statutory Trust is a type of trust that is established for the purpose of investing in real estate or other assets. A key difference between the two is that a tenancy-in-common provides each owner with a distinct share of the property, whereas a Delaware Statutory Trust provides the beneficiaries with an interest in the trust itself. Another notable difference is that a tenancy-in-common does not offer limited liability protection to its owners, while a Delaware Statutory Trust provides limited liability protection to its beneficiaries.
Like TICs, DSTs are generally put together by investment sponsors that find the property and then sells the DST interests to individuals. Often brokerage firms are used by the DST sponsor companies for finding the individuals to invest. For this service, brokerage firms are generally paid a high commission, often 7% or higher (a 7% up front commission is well in excess of the commissions offered financial advisors selling annuities or mutual funds, which creates an inherent conflict of interest for advisors recommending DST investments).
Some of the DST sponsors that create Delaware Statutory Trust investment deals are:
- Bluerock Value Exchange
- Cantor Fitzgerald
- Capital Square 1031
- Four Springs TEN31 Xchange
- Inland Private Capital Corporation
- Moody National Companies
- Nelson Brothers
- Net Lease Capital Advisors
- Smart Stop Asset Management
- Livingston St. Capital
- Everest Realty Management
- Madison Realty Companies
- RK Properties
- Starboard Realty Advisors
- KB Exchange Trust
- Essex Realty Investments (ERI)
- Avistone Premier Business Parks
- Arrimus Capital
- Black Creek Group
- Landmark Dividend, LLC
- NB Private Capital
- Nelson Partners Student Housing
- Griffin Capital Guardians of Wealth
- Pacific Oak-Related
- Core Pacific Advisors
- American Capital Group
- Croatian Investments
- REVA Kay (Real Estate Value Advisors)
- Flatiron Asset Management
- JLL Exchange
- Syndicated Equities
- CAI Investments
- Cunat Exchange
- Trilogy Real Estate Group
- Carter Exchange
- Go Store It
- Valeo Groupe Americas
DST Tax Advantages
DSTs give you the same tax benefits you’d get from direct real property ownership or a TIC, including mortgage interest deduction. Also, most people purchase a DST by performing a 1031 like kind exchange, allowing the purchaser to defer capital gains on a previous investment. This can make DST investments attractive to older real estate investors who still want the benefits of real estate ownership but without the hassle. Brokerage firms that sell DSTs often focus on the tax deferral, income potential and lack of day-to-day management as the basis of recommending DSTs. There are downside risks though.
Downside Risks of Investing in DSTs
Liquidity – Like other real estate, a DST is considered an illiquid asset. Though you may be receiving cash flow, you won’t have access to any proceeds until the asset is sold, and the program concludes, which could involve a span of 7-10 years or more.
Rights – In a DST, you are basically a silent partner. Investors in a DST do not have a formal vote regarding property operations or dispositions. As such, you don’t have a say in who leases the property, what capital improvements should be made, when the asset should be sold, or anything else concerning the property.
Selling – The biggest risk for investors may be lack of control in when the investment will be sold. In this regard, DST owners have even fewer rights than TIC owners (whose rights are also limited by the nature and structure of TICs).
Additionally, once the trust is formalized, no future equity contributions can be made to the DST. DSTs cannot renegotiate the terms of the existing loans, or add new loans. DSTs cannot reinvest the proceeds from the sale of its investment real estate. The only capital expenditures the DST can make with respect to the property are those for normal repair and maintenance, minor non-structural capital improvements, and those required by law. These limitations can be catastrophic in volatile market climates (i.e. when the market declines and tenants fail to renew or pay their rent).
FINRA Brokerage Firm Responsibilities involving DSTs
When selling any investment, broker dealers are required to perform adequate due diligence on all investment recommendations. They must ensure that each investment recommendation that is made is suitable for the investor in light of the investor’s age, risk tolerance, net worth, financial needs, and investment experience.
When selling DSTs there are additional duties brokerage firms have given the untraditional nature of DSTs compared to more traditional investments like ETFs or mutual funds.
Specifically, DSTs are considered by FINRA to be “non-conventional investments.” Notice to Member 03-71 (“NTM 03-71”) reminded brokers and broker-dealers of their requirements as they pertained to the sale of non-conventional investments (NCIs).
The notice to member specifically requires broker-dealers that sell NCIs to, among other things, conduct (1) appropriate due diligence, (2) perform a reasonable-basis suitability analysis, (3) perform customer specific suitability analysis for recommended transactions, (4) provide a balanced disclosure of the risks and rewards associated with a particular product, especially when selling to retail investors; (5) implement appropriate internal controls; and (6) train registered persons regarding the features, risks, and suitability of these products.
NTM 05-18 also reinforced these same basic obligations and directed the message to Members with regard specifically to TIC sales (as stated above, TICs and DSTs are structured very similarly). This notice also reminded brokers that sell TICs to, among other things, conduct (1) appropriate due diligence, (2) perform a reasonable-basis suitability analysis, (3) perform customer specific suitability analysis for recommended transactions, and (4) ensure that promotional materials are accurate.
NTM 05-18 also reminds firms of their requirement to balance the potential tax savings provided by performing a 1031 exchange with the costs of purchasing a particular TIC property. This can be a very important consideration when deciding whether to purchase a DST. While a 1031 exchange may allow an investor to defer capital gains on the sale of an investment, if the cost of the replacement investment is the same or more than the tax benefits, then the risk and other downsides of DSTs must be a greater consideration.
As stated above, brokerage firms often focus on the tax advantages and income potential of DSTs and downplay the risks, illiquidity, and costs. However, they are required by FINRA rules to balance these considerations before making any DST recommendations and brokerage firms’ failure to properly disclose and account for these risks is often where they get in trouble when selling these products.
What is FINRA Arbitration?
FINRA is a non-governmental organization that regulates the securities industry in the United States. It is responsible for overseeing the activities of brokerage firms, and for enforcing rules and regulations related to the trading of securities. Seeking restitution through FINRA arbitration can be a helpful process if you feel as though you’ve been defrauded. Once you’ve retained a securities fraud attorney, the process of filing a claim through FINRA could take place. This claim should include a description of the fraud, the amount of money lost, and any supporting documentation. Once the claim is filed, FINRA will appoint an arbitrator to hear the case. The arbitrator is responsible for reviewing the evidence and making a decision about whether the investor is entitled to restitution. If the arbitrator rules in favor of the investor, they will issue an award for damages, and this can be used to seek restitution from the person or company that defrauded the investor. FINRA is overseen by the Securities and Exchange Commission (SEC) and is authorized by Congress to protect U.S. investors from investment fraud by making sure the broker-dealer industry operates fairly and honestly.
Is a DST Delaware State Trust Investment Suitable for You?
Your financial advisor should only recommend investments that are suitable for their clients. The financial advisor should conduct a suitability analysis on a holistic level. Liquidity needs, time horizon, risk tolerance, age, income, are just a few categories an advisor should consider prior to recommending any investment. Once that is completed the brokerage firm must ensure that due diligence was completed at every level of each investment.
Fortunately for investors who purchase a DST through a brokerage firm, you may be able to recover investment losses through FINRA arbitration.
The White Law Group exclusively represents investors in claims against brokerage firms through the FINRA arbitration process. If you suffered losses investing in a Delaware Statutory Trust (DST), please call The White Law Group at 1-888-637-5510 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.
For more information on The White Law Group, and its representation of investors, please visit: whitesecuritieslaw.com.
Tags: 1031 DST Last modified: July 20, 2023