DST Participants: The roles of Sponsors, Trustees, Beneficiaries in a Delaware Statutory Trust.

“WHO ARE THOSE GUYS” — There was a recur­ring scene in the movie “Butch Cas­sidy and the Sun­dance Kid” while the two were being chased dur­ing the movie.  In the scene the ques­tion “Who are those guys?” would be a rhetor­i­cal ques­tion as they were being chased. Some investors may won­der the same thing when attempt­ing to iden­ti­fy the roles in a Delaware Statu­to­ry Trust.

Feb. 26, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

Real estate invest­ments may uti­lize a Delaware Statu­to­ry Trusts (DSTs) to struc­ture the ven­ture. With­in the struc­ture and con­text of the DST there are spe­cif­ic roles and respon­si­bil­i­ties of each par­tic­i­pant. There will be many sup­port­ing enti­ties that may con­duct duties but there are typ­i­cal­ly pri­ma­ry par­tic­i­pants in the DST.  These may be the spon­sor, the trustee, the ben­e­fi­cia­ry and poten­tial a finan­cial advi­sor. The finan­cial advis­er may not be specif­i­cal­ly men­tioned in the doc­u­ment since each investor may use their own advi­sor.

Spon­sors:
Locat­ing poten­tial prop­er­ty or asset: Pri­or to cre­at­ing the DST for indi­vid­ual investors to par­tic­i­pate the spon­sor needs to locate a poten­tial prop­er­ty or what is ref­er­enced as an asset. Spon­sors may have a direct source of poten­tial prop­er­ties through what may be ref­er­enced as a pipeline. This pipeline may be with real estate devel­op­ers, real estate bro­kers or oth­er sources to locate prop­er­ties. Once the prop­er­ties are locat­ed then there is the process of due dili­gence to ensure the prop­er­ty fits the qual­i­fi­ca­tion of mov­ing to the next step. The qual­i­fi­ca­tions may be the same as all real estate acqui­si­tions such as loca­tions, access, vis­i­bil­i­ty, jobs in the area.  Dif­fer­ent asset class­es will have spe­cif­ic needs that will poten­tial­ly add to the via­bil­i­ty of the acqui­si­tion.

DST Cre­ation and Struc­ture:
Ulti­mate­ly the spon­sors are respon­si­ble for cre­at­ing and struc­tur­ing the DST.  The cred­i­bil­i­ty and expe­ri­ence of the spon­sor is crit­i­cal to the suc­cess. Some spon­sors have been in DST offer­ing busi­ness for a long time and that may be their only busi­ness. Oth­er spon­sors have been in the real estate busi­ness (Real Estate Invest­ment Trust REIT) for num­bers of years and moved into offer­ing DSTs. Spon­sor cred­i­bil­i­ty, expe­ri­ence and back­ground is very crit­i­cal.

 Once a prop­er­ty is locat­ed, researched, and placed under con­tract there is a mam­moth amount of work to com­plete the due dili­gence let alone ver­i­fy all the com­po­nents are in place that may val­i­date this prop­er­ty would be suit­able as a DST. Then the doc­u­men­ta­tion starts with draft­ing all the gov­ern­ing doc­u­ments as well as set­ting up the ini­tial finan­cial com­po­nents that will even­tu­al­ly acquire the prop­er­ty.  There may be bridge fund­ing involved in tak­ing down or plac­ing it under con­tract with the sell­er of the prop­er­ty or the spon­sors may take down the prop­er­ty from their bal­ance sheet.

DST Due Dili­gence:
Once the prop­er­ty is secured the spon­sors will con­tin­ue due dili­gence ensur­ing all the com­po­nents are in place.  The spon­sor will also make rec­om­men­da­tions to the Trustee. The spon­sor also over­sees the com­pi­la­tion of all the nec­es­sary items to be includ­ed in the Pri­vate Place­ment Mem­o­ran­dum (PPM). There is an entire acqui­si­tion team work­ing on the offer­ing doc­u­ments, pro­jec­tions, agree­ments for prop­er­ty man­age­ment. There are the IRC require­ments that also need to be met in the struc­ture.

Start­ing with the end in Mind. This typ­i­cal­ly revolves around the poten­tial Exit Strate­gies. When the time comes for the prop­er­ty to be sold the spon­sor will cre­ate poten­tial options. Actu­al­ly, the trust will be sold, and the over­all suc­cess of the invest­ment may be deter­mined on the tim­ing of the final sale.  When the time comes for the prop­er­ty to be sold investors will have an option to have the pro­ceeds sent to them.  There may also be anoth­er 1031 exe­cut­ed with­er into anoth­er DST or into a tra­di­tion­al prop­er­ty.  All pro­ceeds will be sent to the Qual­i­fied Inter­me­di­ary (QI) des­ig­nat­ed by the indi­vid­ual investor. Spon­sor who may also have affil­i­a­tion with a REIT may have an option to have anoth­er IRC Strat­e­gy.  This may be a Sec­tion 721 UPREIT. Cer­tain DSTs will have the 721 as an option or as a manda­to­ry exit.

Trustees:
The Trustees man­age and admin­is­ter the DST and are appoint­ed typ­i­cal­ly by the spon­sor. The trustees have a Fidu­cia­ry Duty to act in the best inter­ests of the ben­e­fi­cia­ries.

 The deci­sions regard­ing the trust’s assets and oper­a­tions are made by the Trustee. These deci­sions are cru­cial to keep­ing the DST in com­pli­ance. The Trustees also make deci­sions that will avoid the sev­en dead­ly sins that may negate the DST. Trustees also will over­see prop­er­ty man­age­ment, acqui­si­tions, and dis­po­si­tions, among oth­er respon­si­bil­i­ties.

There are legal require­ments (IRC) as well as com­pli­ance with the trust agree­ment that needs to be fol­lowed. assume this respon­si­bil­i­ty and safe­guard the inter­est of the ben­e­fi­cia­ries.

Investors AKA Ben­e­fi­cia­ries:
The indi­vid­ual investors who pur­chase an inter­est int eh DST (either direct cash or via 1031 exchange) are con­sid­ered the ben­e­fi­cia­ries. The investor inter­est is in the form of ben­e­fi­cial inter­est. The ben­e­fi­cial inter­est is a part of the trust assets (may be the largest part).

Pas­sive Investors:
When you do not active­ly man­age an invest­ment, you are con­sid­ered a pas­sive man­ag­er and con­sid­ered a pas­sive investor. That means the income is pas­sive income. The ben­e­fi­cia­ries are con­sid­ered pas­sive investors. The day-to-day man­age­ment of the DST is the respon­si­bil­i­ty of the trust man­ag­er des­ig­nat­ed by the trustee. The trustee makes the deci­sion on behalf of the ben­e­fi­cia­ry.

Dis­tri­b­u­tion of Poten­tial Income:  
Most DSTs by design are struc­tured to gen­er­ate income. The ben­e­fi­cia­ries receive income gen­er­at­ed by the trust. DST that do not pay a reg­u­lar dis­tri­b­u­tion by design typ­i­cal­ly have oth­er finan­cial and tax ben­e­fits for the ben­e­fi­cia­ries.  DST pro­vides a ben­e­fi­cial inter­est to the investors based on the pro­por­tion­al invest­ment of equi­ty pro­vid­ed to the DST.

Sum­ma­ry:
To prop­er­ly struc­ture a Delaware Statu­to­ry Trust there are many func­tions that need to be under­tak­en. Investors who under­stand the roles of spon­sors, trustees, and ben­e­fi­cia­ries. The effec­tive func­tion­ing of a Delaware Statu­to­ry Trust is also crit­i­cal to main­tain com­pli­ance with all IRC require­ments. Well-draft­ed agree­ments that clear­ly out­line the respon­si­bil­i­ties and rights of all par­ties involved is required.  The trust agree­ment will out­line all the terms with spe­cif­ic roles defined.  These terms will also define the pow­ers of each the par­tic­i­pants.

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. 8215 SW Tualatin ‑Sher­wood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.