Distributions in DSTs: Explaining how Profits and Returns are Distributed among Beneficiaries in a Delaware Statutory Trust.

Investors in a Delaware Statu­to­ry Trust (DST) are con­sid­ered ben­e­fi­cial own­ers or ben­e­fi­cia­ries. Under the DST struc­ture there would be a dis­tri­b­u­tion of income gen­er­at­ed from the under­ly­ing real estate.

March 10, 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

In addi­tion, if there are prof­its from the sale of the DST then ben­e­fi­cial own­ers would share in those prof­its based on their pro­por­tion­ate share of own­er­ship. Under­stand­ing how poten­tial dis­tri­b­u­tion will be struc­tured is a key ele­ment of due dili­gence.

Pass-Through Enti­ty:

The Trust does not pay tax­es on the income col­lect­ed from any of the invest­ments. DSTs are con­sid­ered a pass-through enti­ty for tax pur­pos­es. The indi­vid­ual ben­e­fi­cia­ries will receive dis­tri­b­u­tion of income, gains on the sale of the prop­er­ty (if any), deduc­tions for depre­ci­a­tion and inter­est pay­ments on any loan (if applic­a­ble).

Rental Income:
DSTs assets may be mul­ti­fam­i­ly, stu­dent hous­ing, indus­tri­al, self-stor­age, etc. Many and almost all DST are struc­tured with income to be dis­trib­uted.  The pri­ma­ry source of cash flow in gen­er­at­ed from the under­ly­ing real estate.  

Dis­tri­b­u­tion Fre­quen­cy:
The Pri­vate Place­ment Mem­o­ran­dum (PPM) will state when the pro­posed dis­tri­b­u­tion will be sent to the ben­e­fi­cia­ries. Most dis­tri­b­u­tions are sent to the ben­e­fi­cia­ry des­ig­nat­ed account via ACH. These dis­tri­b­u­tions are sent often month­ly or quar­ter­ly.

Pro­por­tion­al Dis­tri­b­u­tion:
Investors own a frac­tion­al inter­est in the DST and are con­sid­ered ben­e­fi­cial own­er and have a pro­por­tion­al share of own­er­ship.  The own­er­ship per­cent­age is deter­mined on the amount of cash (cap­i­tal) the indi­vid­ual investor con­tributes to the DST Trust.

Pri­or­i­ty Dis­tri­b­u­tions:
Each DST (with a under­ly­ing real estate asset) may have expens­es that the Trustee will need to pay from the ten­ant income. These oblig­a­tions will also be stat­ed in the PPM and include a vari­ety of oper­at­ing expens­es, poten­tial­ly debt ser­vice on any loans on the prop­er­ty, tax­es, and oth­er poten­tial expens­es.  These expens­es are paid pri­or to any dis­tri­b­u­tion to the ben­e­fi­cial own­ers.  Triple Net Lease arrange­ment (where the ten­ant pays all the build­ing expens­es) may pro­vide for a high dis­tri­b­u­tion to the ben­e­fi­cial own­ers.

Return of Cap­i­tal:
When the prop­er­ty is sold (as deter­mined by the spon­sor) there may be a dis­tri­b­u­tion from the sale. The dis­tri­b­u­tion may be a com­bi­na­tion of return of cap­i­tal and poten­tial­ly prof­its from the sale. The return of cap­i­tal may not be con­sid­ered a tax­able event (unless the invest­ment was a 1031 exchange). The pro­ceeds of the sale would be con­sid­ered a cap­i­tal gains event. Many investors will inves­ti­gate uti­liz­ing a 1031 exchange.

Reserves and Con­tin­gen­cies:
The PPM will dis­close the funds need­ed for any prop­er­ty improve­ments, any cap­i­tal expen­di­tures as well as any reserve and con­tin­gency fund­ing. This is very impor­tant since the DST is not able to reaise addi­tion­al cap­i­tal once the DST is in place. The trustee needs to ensure the DST has suf­fi­cient funds to main­tain the prop­er­ty.

Tax Impli­ca­tions:
One of the tax ben­e­fits DST investors enjoy is the pass through struc­ture of the DST. The ben­e­fi­cial own­ers may uti­lize deduc­tion on their indi­vid­ual returns for loss­es, depre­ci­a­tions, gains, loss­es that flow through to their indi­vid­ual returns. The same tax advan­tages of tra­di­tion­al real estate apply to DSTs. 

Dis­tri­b­u­tion Water­fall:
The PPM may out­line a dis­tri­b­u­tion of income above a base rent typ­i­cal­ly found in a pro­for­ma in the PPM.  There may be a shar­ing of rents above the base rent called bonus rent.  The bonus rent may be shared in some type of split between the mas­ter ten­ant (for per­for­mance) and the investors. Upon the sale there may also be a water­fall of prof­itabil­i­ty in some struc­tures. Cer­tain cost of sale items such as pay­ing off out­stand­ing mort­gage or oth­er expens­es would be paid and then a dis­tri­b­u­tion to the investors.

Sec­ondary Mar­ket Con­sid­er­a­tions:
There are lim­it­ed sec­ondary mar­kets for the sale of a DST. For this rea­son, investors need to under­stand that DST are con­sid­ered an illiq­uid invest­ment.  There may be options for investors to sell their ben­e­fi­cial inter­est in the DST pri­or to the Trustee ini­ti­at­ing a sale. How­ev­er, cer­tain restric­tions may affect the sale.

Con­clu­sion:
DSTs require that the PPM is pro­vid­ed to prospec­tive investors. This includes all the offer­ing doc­u­ments regard­ing the DST. Con­sult­ing a finan­cial advi­sor who under­stands the struc­ture and func­tion of the DST as well as the 1031 exchange is strong­ly encour­aged.

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. 

SOCIAL MEDIA

Social Media plat­forms are sole­ly for infor­ma­tion­al pur­pos­es. Advi­so­ry ser­vices are only offered to clients or prospec­tive clients where the advi­so­ry firm and its rep­re­sen­ta­tives are prop­er­ly licensed or exempt from licen­sure. Past per­for­mance is no guar­an­tee of future returns. Invest­ing involves risk and pos­si­ble loss of prin­ci­pal cap­i­tal. No advice may be ren­dered by NAMCOA unless a client ser­vice agree­ment is in place.