DST Educational Series A- Part 8: Limitations on a DST

Welcome DST News! Our goal is to provide non-biased education and market information for Accredited Investors on DSTs. We hope to provide a Depth & Breath of knowledge for Investors About Delaware Statutory Trusts (DSTs).

By Al DiNicola, AIF® Feb 16, 2022

Given the DST commercial aspect of the real estate with a security wrapper there are several situations to understand with regards to DST.  The DST must adhere to the following prohibitions, which are commonly referred to as the Seven Deadly Sins (See IRS Revenue Ruling 2004-86):

  • Once the offering is closed, there can be no further capital contributions to the DST by either existing or new investors.
  • The DST cannot renegotiate existing loans or borrow more funds (except in the case of a tenant’s bankruptcy or insolvency).
  • The DST cannot reinvest proceeds from the sale of its real estate.  All proceeds need to be returned to the individual investors.
  • The DST is limited to making minor, nonstructural capital improvements, in addition to those required by law.
  • Any reserves or cash held between distribution dates can only be invested in short-term debt obligations.
  • All cash, other than necessary reserves, must be paid out to investors.
  • The DST cannot renegotiate existing leases or enter into new leases (except in the case of a tenant’s bankruptcy or insolvency).

Many of these prohibitions are in place to protect the individual investors.  There was a brief period which permitted DSTs (and other similar investments) to raise more capital and that occurred during the first year of the COVID 19 pandemic.  The IRS permitted a brief period of restructuring for certain investments.  The rent moratorium affected many smaller landlords thought the country.  There were a few DST that needed to do a brief capital raise or invoke other solution for falling incomes in the Multifamily properties.  Surprisingly there were very few major issues and sponsors did not need to utilize the modification of the limitations.

Look for Part 9: Why Consider a DST?

DST’s (Delaware Statutory Trusts) are for accredited investors only.  Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus.  Investing in securities, real estate, or any investment, in any form, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.   NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated. 

About the author

Al DiNicola, AIF, CEPA, specializes in 1031 Exchanges utilizing DST as a viable alternative for accredited investors. He also is well versed in Opportunity Zones and Alternative Real Estate Investments. Mr. DiNicola has more than 40 years of experience in commercial & residential sales and development. Al has extensive experience in real estate land acquisitions, development, investment and real estate securities.

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