NNN vs. DST ~ Differences & Advantages

Fre­quent­ly we receive ques­tions regard­ing the dif­fer­ences between a tra­di­tion­al real estate invest­ment that has a triple Net Lease (referred to as an NNN) and a Delaware Statu­to­ry Trust (DST).

June 20, 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

Finan­cial advi­sors and real estate bro­kers have a dif­fer­ence of opin­ion at times on which invest­ment vehi­cle offers more options. There are a few sim­i­lar­i­ties between the two options as well as sig­nif­i­cant dif­fer­ences in the struc­ture and man­age­ment respon­si­bil­i­ties.

AS a real estate bro­ker and prac­ti­tion­er as well as aa finan­cial advi­sor I can pro­vide some back­ground and col­or as to the advan­tages of each.

Triple Net Lease (NNN)

1. Struc­ture:

• The investor would secure the prop­er­ty through the nor­mal process of acquir­ing real estate.
• The investor would pro­vide all the cash to acquire the prop­er­ty or arrange for equi­ty and in most cas­es recourse financ­ing for the bal­ance of the acqui­si­tion.
• Financ­ing terms will depend on the type of prop­er­ty, debt cov­er­age ratios and oth­er items gen­er­al­ly required by the lender.
• The investor will arrange to apply for and be approved for the loan (if any).
• There is a lease agree­ment exe­cut­ed between the investor and the ten­ant. In a NNN the ten­ant agrees to pay all the property’s oper­at­ing expens­es. This includ­ed real estate tax­es, build­ing insur­ance, and com­mon area main­te­nance. There is also a base rent with poten­tial rent bumps or increas­es over the term of the lease.
• The ten­ant may have some addi­tion­al write-offs for expens­es under the terms of the lease.

2. Own­er­ship:

• The own­er­ship of the prop­er­ty may be a sin­gle investor or a group of investors.
• The investors do not need to have the same per­cent­age of own­er­ship.
• Any addi­tion­al cap­i­tal need­ed dur­ing the own­er­ship would be the respon­si­bil­i­ty of the investors depend­ing on the spe­cif­ic terms of the lease.

3. Invest­ment Size:

• The over­all size of the real estate prop­er­ty being acquired may require greater equi­ty; cash of amount bor­rowed than many investors are accus­tomed to invest­ing. Many investors will pur­chase a prop­er­ty indi­vid­u­al­ly rather than a group.
• The amount of cash or debt need­ed may lim­it many investors
• Cer­tain invest­ment group struc­tures (such as ten­ants in com­mon or TICs) may also car­ry addi­tion­al lia­bil­i­ties.

4. Man­age­ment:

• Many investors (espe­cial­ly boomers) are seek­ing real estate with min­i­mal respon­si­bly. The struc­ture of the lease should shift most of the man­age­ment duties to the ten­ants.
• Many prop­er­ties with a NNN lease in place (few­er respon­si­bil­i­ties) increase the attrac­tive­ness for investor acqui­si­tion.

5. Liq­uid­i­ty:

• If the NNN prop­er­ty is owned by an indi­vid­ual investor the prop­er­ty can be more liq­uid than if owned in a part­ner­ship where part­ner approval is need­ed. This is also true when com­pared to a DST inter­est. Every mar­ket is dif­fer­ent, and each prop­er­ty may have dif­fer­ent appeals to buy­ers.
• Cap­i­tal may be accessed as soon as the prop­er­ty is sold.

6. Risk and Return:

• Each ten­ant will have a dif­fer­ent cred­it rat­ing or cred­it wor­thi­ness.  Some ten­ants may have a cred­it rat­ing which may reduce the risk.
• Cred­it ten­ants (cor­po­rate backed) may also have a high­er like­ly hood of steady cash flow.
• Each lease struc­ture will be dif­fer­ent. How­ev­er, if most of the prop­er­ty expens­es are han­dled by the ten­ant there may be a poten­tial for high­er return.
• .

7. 1031 Exchange Com­pat­i­bil­i­ty:

• The under­ly­ing prop­er­ty with the NNN prop­er­ties qual­i­fies for 1031 exchanges when acquir­ing as well as sell­ing
• Investors may defer cap­i­tal gains tax­es by exe­cut­ing an exchange
• There may be addi­tion­al com­pli­ca­tions depend­ing on the own­er­ship struc­ture of a part­ner­ship, espe­cial­ly if there is not full agree­ment on the sale. Addi­tion­al­ly, if one of the part­ners wish­es to enter into a 1031 exchange there are addi­tion­al steps need­ed.

Delaware Statu­to­ry Trust (DST)

1. Struc­ture:

• The state of Delaware has cre­at­ed the DST as a legal enti­ty
• Mul­ti­ple investors may hold dif­fer­ent frac­tion­al inter­ests in real estate prop­er­ties.

2. Own­er­ship:

• Unlike direct own­er­ship in real estate investors will hold a ben­e­fi­cial inter­est in the DST (or Trust)
• Investors do not receive a title to the real estate since the trust will hold the title to the prop­er­ty.
• Investors must have accred­it­ed investor sta­tus.

3. Invest­ment Size:

• One of the main advan­tages of the DST is the abil­i­ty for investors to par­tic­i­pate with few­er invest­ment dol­lars. This may enable an investor to spread the same invest­ment dol­lars among a vari­ety of prop­er­ties.
• Cash investors may ben­e­fit with the abil­i­ty to invest as low as $100,000 in real estate.
• DST are fre­quent­ly used when investors use 1031 exchanges.
• Defer­ral if cap­i­tal gains is one of the main advan­tages of the 1031

4. Man­age­ment:

• Investors move from active man­age­ment to pas­sive man­age­ment. The spon­sor or trustee han­dles the man­age­ment respon­si­bil­i­ties.
• The day-to-day oper­a­tions are han­dled so the investor can enjoy pas­sive own­er­ship.
• For investors who want to be active in the man­age­ment would not be a poten­tial investor in a DST.

5. Liq­uid­i­ty:

• In the Pri­vate Place­ment Mem­o­ran­dum (PPM) there is a dis­clo­sure stat­ing that DSTs are con­sid­ered illiq­uid; Sell­ing pri­or to the end of the own­er­ship terms would be very dif­fi­cult since there are very lim­it­ed sec­ondary mar­kets for par­tial own­er­ship inter­est.
• Investors need to rely on the spon­sor of the trust to posi­tion the prop­er­ty for sale at the end of the hold­ing peri­od.

6. Risk and Return:

• DSTs are struc­tured with mul­ti­ple investors. In the­o­ry this reduces indi­vid­ual expo­sure.
• Unlike tra­di­tion­al real estate DST (if car­ry­ing debt) is con­sid­ered non-recourse in struc­ture.
• Most DSTs pro­vide a month­ly dis­tri­b­u­tion to investors and are con­sid­ered sta­ble.

7. 1031 Exchange Com­pat­i­bil­i­ty:

• Investors who uti­lize a 1031 exchange may include the DST as a poten­tial alter­na­tive.
• DSTs are con­sid­ered like-kind prop­er­ty.
• Investors have all the advan­tage to defer cap­i­tal gains tax­es when rein­vest­ing in like kind prop­er­ty
• Like- kind enjoys a broad range of real estate.

Sum­ma­ry

NNN is put in place once a prop­er­ty is acquired. The terms of a NNN lease will spec­i­fy that the ten­ant is respon­si­ble for most of the oper­at­ing expens­es on the prop­er­ty includ­ing the prop­er­ty tax­es. Investors may exe­cute a 1031 exchange to acquire and sell a prop­er­ty.

DST is a frac­tion­al own­er­ship (ben­e­fi­cial inter­est) in a real estate invest­ment. The trust is man­aged by a trustee. This is ide­al for pas­sive investors. Investors may exchange into and out of a DST.  Cer­tain DSTs may also have a 721 UPREIT option. Investors will deter­mine which alter­na­tive is best for their needs. Fac­tors to con­sid­er are suit­abil­i­ty, liq­uid­i­ty needs, and risk tol­er­ance. DSTs enjoy the non-recourse debt assign­ment.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. 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, whether pub­lic or pri­vate, 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.

Thank you.