■ A Delaware statutory trust (DST) is a legally recognized trust that is set up for the purpose of business. DST’s have become popular as 1031 Tax Deferred Exchange properties.
■ A step-by-step process that replaces the unidentified property in your exchange with the assurance that your upleg investment will directly improve your investment position.
■ Have an opportunity to diversify your investments and limit your exposure by investing in a professionally managed, multi-owner property in a strong and growing market.
■ Remove yourself from the day to day management of real estate.
■ You can potentially double your cash flow by putting your passive equity to work.
■ Monthly distributions conveniently deposited directly into your bank account.
■ Estimated annualized distributions ranging from 5-8%.
■ Multiple asset types (multifamily, triple net, commercial, etc.) and locations are available.
■ High quality “Institutional” properties located in carefully researched markets.
What are the Benefits?
For real estate investment owners considering selling their appreciated property, it may be beneficial to consider a DST as replacement property when utilizing a tax-deferred 1031 Exchange. DSTs may provide a unique and flexible solution to investment real estate owners looking to defer tax and continue to own investment real estate, yet seek to eliminate the active management of directly owned Fee-Simple property.
DSTs Qualify For a 1031 Exchange
First and foremost, Delaware Statutory Trusts are considered a qualified replacement property for IRC 1031 Exchanges, as established by IRS Revenue Ruling 2004-86. DSTs can be identified either as ‘primary replacement properties’ or as a sort of ‘insurance’ in case a Fee-Simple property cannot be found and closed within the mandated exchange timeline.
Defer Capital Gains Tax
Delaware Statutory Trusts allow real estate investors to defer paying taxes on the sale of an investment property, which can be very expensive. In some states, the total amount of tax can be as high as 37%.
- Federal Capital Gains Tax: 15% - 20%
- State Capital Gains Tax: 0% - 13.3%
- Depreciation Recapture Tax: 25%
- Net Investment Income Tax: 3.8%
However, by utilizing a 1031 Exchange, an investment property owner can defer their tax, as long as they acquire a replacement property or properties of equal or greater value.
Eliminate Active Property Management
Beyond deferral of taxes, unlike most investment real estate, ownership of DSTs is entirely management free. The only responsibility of an owner is to select which DSTs they would like to exchange into. We have developed a very well-received approach to determine our clients' objectives and assist them in selecting the appropriate DSTs among the offerings we have vetted and approved.
Potential For Competitive Cash Flow
Typically, DST properties are structured with an emphasis on cash flow for the investors and because Delaware Statutory Trusts acquire high-quality institutional property in cities with strong projected growth, DSTs can focus on preserving investment value and producing income potential for their owners. Annual cash flow to the investors varies from trust to trust depending on the property type and sponsor, however investors may have the potential to experience greater cash flow through the ownership of the DST property than that of their relinquished property.
Low Minimum Cash Investments
Investment minimums for Delaware Statutory Trusts are quite low, typically $100,000. Low minimums allow for exchangers to acquire multiple DSTs – effectively creating their own personal property portfolio, diversified among multiple property types, geographic areas, and DST sponsors.
High-Quality Investment Property
The underlying real estate held by DSTs tends to be high-grade institutional property. Due to the rigid criteria established by the IRS for a DST property to qualify for exchange purposes, rarely is any other type of property, other than highgrade investment property, considered for the trust. It is common for a DST property to be leased to credit-worthy Fortune 1000 companies. In fact, a number of DST sponsoring firms require long-term leases with Fortune 1000 companies, or privately held companies with assets in excess of $100 million, to be in place before formation of the trust. DST ownership provides investors access to properties held traditionally by pensions, REITs, and large institutional investors.
Low Cost Non-Recourse Debt Matching
Most investors have debt that must be matched in their exchange. DST sponsors understand this and, as a result, many DSTs are structured with debt in place. Access to low-cost non-recourse debt is a major benefit of DST ownership, one that serves to enhance potential cash flow and appreciation. Delaware Statutory Trusts also provide liability protection for their owners, further reducing risk of ownership.
Increase Annual Depreciation to Offset Income Tax
There are a number of key tax benefits associated with DSTs including the potential to increase annual depreciation to offset taxable income and the ability to own DST property in non-income tax states.
Opportunity For Appreciation
Ownership of an interest in a DST shares many similarities with ownership of Fee- Simple property, including the opportunity for appreciation. Furthermore, the Delaware Statutory Trust distributes all potential appreciation to the DST owners, consistent with their percentage ownership of the Trust.
Eliminate Tax For Estate Beneficiaries
The benefit of increasing cash flow and invested dollars is clear, but perhaps the biggest benefit of a 1031 Exchange is that it allows for a "step-up in basis" upon the passing of an owner. “Step-up in basis” refers to the IRS’s elimination of Capital Gains, Depreciation Recapture, and Net Investment Income Tax upon the death of an owner. In "community property" states, a surviving spouse receives a full step-up in basis to the properties' fair market value. From an estate planning standpoint, DSTs are a particularly attractive solution due to their ability to be seamlessly divided among beneficiaries – whether that be family, charities or any other beneficiaries. Furthermore, because DSTs are considered illiquid and owned as a non-controlling interest, ownership of DSTs can be discounted by an investor’s CPA when calculating total estate value upon death. It is not uncommon to see discounts ranging from 20%-30% for estate calculation purposes.
Exchange Proceeds Can Be Diversified Among Multiple DST Properties
Due to the replacement property identification rules established by the IRS, multiple DST properties can be combined as replacement property. Furthermore, many DSTs are comprised of multiple properties, thus providing additional diversification. Due to the low minimum investment requirement, additional diversification can be achieved by selecting multiple DST sponsors, property types, and geographic areas.
How Long are DST Properties Held?
Delaware Statutory Trusts are considered illiquid investments, meaning the DST Sponsor will determine when the property is to be sold. The IRS required DST framework states that a DST Sponsor cannot refinance the property; the property must be sold before the loan’s maturity date. There are DSTs available with no debt, in which case there is no required timeline for the property to be sold, however most DSTs have 45% - 55% loan-to-value (LTV) and utilize 10-year fixed rate debt. Therefore, the longest these properties could be held as a Delaware Statutory Trust is 10 years. Typically, DSTs are held for 3 – 9 years. The hold period is long enough to reduce prepayment penalties associated with the debt, yet short enough that the DST Sponsor is not forced to sell the property due to a pending debt maturity date.
The illiquid nature of Delaware Statutory Trusts is what enables the DST Sponsor to monitor market conditions and select a sales date that is most advantageous for the investors. The sponsors we have vetted and work with monitor the properties financial performance, forecasts, rental demand, and competing inventory to select a sale date that benefits the DST owners.
What are the Risks?
What to Consider Before Investing in a DST
Delaware Statutory Trusts are not suitable for every real estate investor. We work diligently to understand an investor's objectives and recommend replacement property options that will position them to accomplish their financial and lifestyle goals. For those in which DSTs are a suitable replacement property option, it is very important to select a 1031 Exchange company that has expertise in tax, real estate, and securities. We encourage all our clients to ask about our proven track record of navigating complex ownership structures, exchanges, implementation of tax strategies, due diligence of DST sponsors and offerings.
Ownership of Delaware Statutory Trusts is still very much ownership of investment real estate. Due to the structure of Delaware Statutory Trusts as a passive ownership entity, a beneficial ownership interest in a DST presents additional risks that the investor should be aware of. The following risks should be fully understood and carefully considered when assessing an investor’s suitability for ownership of a Delaware Statutory Trust:
• Lack of liquidity and timing of exit: Generally DSTs have a target property hold period ranging from 3 – 9 years. The hold period may differ significantly from the targeted timeline based on market conditions. The investment should be viewed as illiquid while invested in the property. Early exit by the investor for liquidity purposes may not be possible or may be only possible at a significant discount to the trust’s net asset value.
• Lack of control: Owners of a beneficial interest in Delaware Statutory Trust have little control over management decisions and eventual sale of the underlying property. The real estate investment company managing the trust is responsible for all operating decisions.
• Failure of due diligence and non-compliance: All DSTs presented by Citivest Realty Services, Inc. are subject to a rigorous due diligence process in which the real estate investment company’s management is thoroughly reviewed, as is each individual DST offerings made available. However, failure to identify an issue may result in mismanagement or non-compliance in adhering to the IRS criteria established for a DST to qualify for tax-deferred exchange treatment.
• Loan modifications may not be possible: Due to the structure of a DST, restructuring the financing of the property may not be possible without changing the legal ownership structure. DSTs mitigate this issue by utilizing master lease agreements between the trust and the real estate investment company.
• Projected cash flow may not be consistent with actual performance: As with any real estate property investment, cash flow levels are subject to market, economic, tenant and location risk. Projected cash flows are typically conservative in nature; however, they are not guaranteed.
• Projected appreciation may not occur: As with any real estate property investment, asset appreciation is subject to market, economic, tenant and location risk. Appreciation may not occur at the end of the trust’s property holding period or the holding period may be extended beyond stated projections.
• Interest rate risk: The value of real estate is heavily impacted by the current interest rate environment. Changes in current interest rates may increase uncertainty surrounding financing, leasing and appreciation.
• Regulatory risk: DSTs are susceptible to changes in the IRS’s treatment of tax-deferred exchanges. Furthermore, the advantages of ownership of a beneficial interest in a DST for estate planning purposes may be eliminated based on changes in the Internal Revenue Code.
DST management costs and fees: DST structure provides for management fees to the sponsoring real estate investment company. These fees, while thoroughly disclosed upfront could serve to reduce cash flow levels below that of the stated projections.One of the main objectives is to ensure any prospective DST investor is comfortable with the DST structure and is fully informed. Beyond the educational materials and conversations, all DST properties presented to clients will be accompanied by a Prospectus. This full disclosure document will provide detailed information on all relevant matters pertaining to the DST, including risk disclosures.
What is the Process & Timing?
The first step is to determine whether a 1031 Exchange is right for you. This decision is based on your financial and lifestyle objectives, the subject property and your tax liability, were a sale to occur. There are a number of key pieces of information that go into determining whether an exchange is worth considering. If an exchange is appropriate, then your objectives must be thoroughly discussed to understand whether DST ownership may be suitable. Generally, DST ownership can serve to address any of the following objectives:
• Diversify real estate holdings
• Increase potential income
• Increase depreciation to offset tax resulting from income
• Reduce management time and effort
•Simplify real estate for estate planning purposes
•Own higher quality real estate
How to Get Started
Schedule a Complimentary Consultation
If you are interested in learning more about DSTs and whether they may be a good 1031 Exchange option for you, the next step is to contact us to schedule a complimentary consultation. This can be done either via phone or an in-person meeting at our office. Either way, we would be pleased to educate you further on Delaware Statutory Trusts, discuss our process for performing due diligence on DST sponsors and their individual offerings, and assist you in selecting the offerings that will best position you to meet your objectives. We have multiple properties available for your consideration.
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"Mike helped us purchase an upleg property last year and helped us exchange one of our other properties this year. We've put our investments in a position to not only increase our net worth but also show a better return on our invested dollar. We plan on using his expertise in the future to expand our portfolio again"
"As a full time real estate investor I know I'm in good hands with Mike handling my transactions. He has listed and sold both apartment buildings and single family homes for me. I know I can always count on him to close escrow, even with the more difficult ones."
"Mike sold my two four plexs in Buena Park and then helped me find a duplex for my daughter in Orange. I was so happy with his care and attention to my needs that I asked him to help another daughter sell her property."
"I couldn't be more happy with Mike as my agent. He has helped me purchase two four plexs and I am currently in escrow on another four plex. With the current market conditions of low inventory and multiple buyers for the same property it helps to have an agent who is recognized by his colleagues as someone who will get the transaction closed smoothly. I have been able to beat out other buyers for properties because of his credibility with other agents. If it were not for this reputation, then I would not have been able to purchase the properties I have."
“Thanks again for all your help in selling the apartments. Selling properties at above appraisals is amazing to me.”
"Mike Lembeck – Citivest Commercial is truly the real deal
I thought I knew it all after 32 years of buying and selling. . .
"I can tell you that Citivest Commercial is truly the real deal. I have had nothing but good experiences with them. I have bought and sold a lot of property and thought I knew how to do it; I had a good history of doing it. Specifically, there was an apartment building in a rural area we had it on the market for 8 months. We had priced it below market yet we weren’t getting any offers. Nothing was happening at all. The problem was that the market changed and there were certain properties we just could not sell.
Citivest Commercial had approached me many times for a period of several months. Finally, after enough much frustration I decided to give the Citivest Commercial team a try. In what seemed like no time at all we had a lot of offers. In the end we sold our property for the same price the other realtor hadn’t been able to sell it for. If it weren’t for Citivest Commercial, I don’t think we would have sold our apartment building."
"I was very skeptical after many failed attempts to sell
I Talked to 28 Realtors, and NONE HAD MARKETING LIKE Mike.
"I had my property on the market for quite a while, and it wouldn’t sell with many realtors over the course of 1 year. Once it expired I had many realtors sending me information, probably 40. Then I saw something that Mike sent me and it caught my eye. I was very skeptical about working with realtors after being burned over and over. I decided to give Mike a shot and was very happy that I did. I found him to be someone who didn’t make false promises. His marketing team came up with a plan and it really worked! He was not just sitting back once my property was on the MLS and wait for another realtor to bring the buyer. He’s was very aggressive on getting my offers and working out the best one to get me the most money. He’s much more technologically advanced than anyone I had dealt with and most of all he has integrity, he does what he says he will do. I found him to be competent and caring. He addresses every issue I bring up with respect and I have now sold my property and I’m very happy. If I had to sell or buy another apartment building I would come back to Mike"
My apartments were not selling…no offers for 9 months
" Our apartments were on the market for a while with no activity, when it came to for a new agent I decided to give Mike a try. I wanted to sell the property and not have people walking through the property that were not really interested. I’ve heard nothing but complaints (from other sellers) about to many inspections, but it just wasn’t an issue for us. We had a handful of buyers that were already approved and narrowed down to this is exactly what they are looking for. I had a friend who complained about 5 to 7 walk through’s and not one buyer opened escrow. When they had offers come through their real estate agent just wasn’t able to get the deal done. I kept telling her you need to call Mike. Mike was able to take care of every little situation that came up for me. He was able to think through things before they were a problem. After getting the contract, I was concerned with the inspection, because this property was older. I was also concerned with the appraisal but the process went smoothly. Mike was really involved with the whole process to make sure they were aware of all the upgrades to get me the most money for the property. I’ve already recommended Mike to a lot of people. I say if you want to sell your property you need to this guy to handle it for you."
Great marketing team
Great Marketing sold my apartments!
"After a year and a half of being listed with two other realtors Citivest Commercial was able to sell my apartments in 65-days and for more than 98% of the asking price. My apartments had been listed for over 18-months without a sale and it just seemed like high-end properties like ours just weren’t moving. It seemed to be true for our property too. However, because of the Citivest Commercial’s extensive online advertising and promotion, they found a buyer within in just a little over two months who bought it for virtually the same price I had been listed with the other realtors.
We hired Citivest Commercial because we felt like they did more than any other agent had before them. Other agents seemed to just throw the property on the MLS and then would disappear, conveniently forgetting to call us again. With the Citivest Commercial team we were updated every week during the entire process. They did more advertising and promotion than anyone else in the area. I had seen all of the ads and flyers from the Citivest Commercial Team and initially thought they were just under-pricing their listings. But thankfully what I actually thought turned out to be wrong. After a short and easy meeting with the Citivest Commercial team, we felt like confident our property would sell. The results were proven and after 65-days our apartment building sold and got the price we were looking for."
Citivest Commercial will get the job done right away
Timing was very important to us!
"We were very happy that they were able to move the property at a time that was very crucial to us. At first we hired someone to sell our apartment building that didn’t really know what they were doing. They were new to the business. Then, when we hired Citivest Commercial it was amazing. They did so much more for us than the other agents had. At the time, it became very urgent that we sell our property and it became very tiresome to deal with the variety of things that came up. However, once Citivest Commercial got involved things quickly changed for the better. They were diligent and persistent and tenacious.
In the end they were able to sell our apartments at a very critical time. If we had not been able to sell our apartments when we did, we would have had a heap of problems. At first when we received the Citivest Commercial fliers, we were very skeptical as we had already been burned several times. However, we took a chance and everything worked out in the end. The Citivest Commercial team did everything they said they would do. It is with confidence and trust that we would highly recommend them for any of your upcoming real estate transactions. I’m sure there are others out there that may be up against the clock and facing crunch time in terms of selling a property. Citivest Commercial will get the job done right away."
I would highly recommend Citivest Commercial
UNDER PROMISED AND OVER DELIVERED!
"We found ourselves in a pretty sticky spot. We bought our apartment building at the wrong time and then were about $80,000 upside down. After struggling with the payments, we put it on the market. We had almost no activity until Citivest Commercial got involved. They were able to negotiate with the banks get a fair payoff. Everything went great and the Citivest Commercial team kept us in the loop until our property sold.
It was such a great relief because being in financial trouble is just one of the hardest things anyone can endure. It felt like a giant weight was lifted and we were now able to move on and build a new life. Citivest Commercial were true to their word keeping us updated on a constant basis. Even when there were a few bumps in the road (which had nothing to do with them), they kept us informed and just knowing the truth helped us greatly. We felt like they were fighting for us every step of the way.
I’m in sales myself and obviously there is always a temptation to sell your client on more than you could deliver. What we experienced with Citivest Commercial was the exact opposite. They under-promised and over-delivered and in the end we were very happy with the service. I could tell that they were making things happen that were typically very difficult for most agents. They were able to navigate through the complex mortgage banking system like pros. I would highly recommend Citivest Commercial to anyone looking for a professional real estate agent to help them buy or sell an apartment building. "
We were really satisfied with the outcome
Bad experience with other realtors :(
"In the one year experience with other realtors, we only had one so-called offer and it was a little iffy at that. Citivest Commercial put a plan together and suddenly things began to happen. We started getting offers immediately and within 2-months later the apartments were sold. We were really satisfied with the outcome.
We had kind of figured out what our bottom line needed to be and were really excited that we sold the property for more than we had expected, even with the decline in the real estate market. If you want your apartment building sold quickly, then you can trust the agents at Citivest Commercial. They have some great ideas on how to sell properties quickly and at the best price."
Large amount of exposure got me my asking price
Full-price cash offer, highest price in area!
"I choose Citivest Commercial because I liked the large amount of exposure you are provided on the Internet, with the videos ,drone. I was shocked when we had three offers right off the bat, but Mike told me to hold off for another week for a full price offer. Sure enough we had a cash full price offer a week later! Everything was done for me for a timely closing and it was painless! I didn’t do any of it. Mike did all of it. I feel that the increased technology in the advertising and the presentation of my property really made a difference in how quickly it sold and getting my asking price as well. I really liked all the video and the drone shots, it showed the close proximity to the beach. You can say it’s two blocks from the beach but then there are short blocks and there are long blocks. I most definitely would recommend Mike and Citivest Commercial in general for anybody who was thinking of selling their house or buying an apartment building."
"I called Mike because I had sold my apartment building and needed an upleg to complete my exchange. He was able to find me 10 units in Tustin that were taken back by the lender in foreclosure. Without his follow through during the escrow period the escrow probably would not have closed. I still speak to him periodically just to get an update on the current market conditions and to enjoy a laugh with him."