Investors Doing their §1031/DST Research Overview ~ Part Two- Core Structure

We con­tin­ue with Part Two of an investor dri­ven series of edu­ca­tion­al arti­cles Investors want to under­stand the struc­ture of Delaware Statu­to­ry Trusts (DST).  We con­tin­ue to be com­mit­ted to investor edu­ca­tion and con­sul­ta­tion.

May 12, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ist & DST Advisor/Specialist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Investors have found that we are open to pro­vid­ing infor­ma­tion regard­less of whether we are the ulti­mate source of their acqui­si­tion.  This series is designed to equip the investor with infor­ma­tion (prefer­ably with enough time pri­or to any 1031 dead­lines) to chart a course of action.  To coin a well-known phrase this investor is “start­ing with the end in mind”.  Part two will focus on the Core DST Struc­ture.  If you missed Part 1 [Click here]

 Core Struc­ture of a DST

One of the first areas we will cov­er is the Legal Frame­work.

A Delaware statu­to­ry trust is a legal enti­ty formed under Delaware law. Mul­ti­ple investors, known as ben­e­fi­cial own­ers, will hold frac­tion­al or pas­sive inter­est in the sin­gle prop­er­ty or a port­fo­lio of prop­er­ties. That is one of the main rea­sons that DST were cre­at­ed. The DST is man­aged by a sponsor’s firm and gov­erned by a trustee under a spe­cif­ic trust agree­ment.

Typ­i­cal DST Struc­ture Com­po­nent.

Let’s cov­er a cou­ple of few typ­i­cal DST struc­ture com­po­nents.

• Spon­sor- There’s a spon­sor who cre­ates and man­ages the DST. They’re charged with the respon­si­bil­i­ty of sourc­ing the prop­er­ty or prop­er­ties. They also may arrange  financ­ing, if any, is need­ed in order to secure that prop­er­ty.
• Trustee- The trustee legal­ly owns the prop­er­ty, han­dles the day-to-day oper­a­tion, not the investor. This is a key ele­ment in the over­all struc­ture because DST’s are known as pas­sive invest­ments.
• Investors- The investors are known as ben­e­fi­cial own­ers. They hold ben­e­fi­cial inter­est and they receive a pro rata share of the income depre­ci­a­tion and cap­i­tal appre­ci­a­tion, if any, on the prop­er­ty or asset when it sells down the road.
• Mas­ter Lease- There’s a mas­ter lease struc­ture in many DST’s. This is space, espe­cial­ly the case in a retail or triple net lease prop­er­ty. A mas­ter ten­ant may lease the prop­er­ty from the DSD and sub­let it to the actu­al ten­ants.

Sec­tion 1031. Exchanges and DST.

The main uses of DSTs are as replace­ment prop­er­ty in a Sec­tion 1031 tax deferred exchange. This was per­mit­ted under rev­enue rul­ing by the IRS (2004–86). DST’s have been used since 2004 as an accept­able replace­ment prop­er­ty in a §1031 exchanges. The under­ly­ing basis of the exchange enables investors to defer cap­i­tal gains by exchang­ing into DST instead of direct prop­er­ty own­er­ship. The key to the DST is that the investors can­not mate­ri­al­ly par­tic­i­pate in the man­age­ment of the prop­er­ty in order to pre­serve the pas­sive sta­tus. This com­plies with 1031 rules.

DST Invest­ment Char­ac­ter­is­tics

There are a few DST char­ac­ter­is­tics that need to be reviewed.

• Pas­sive Own­er­ship — One of the key ele­ments of the struc­ture is that the investors have no deci­sion-mak­ing author­i­ty. This is ide­al for investors who want to be hands off and not be involved with active man­age­ment.
• Lim­it­ed Lia­bil­i­ty — Many investors want­ed to be shield­ed from per­son­al lia­bil­i­ty asso­ci­at­ed with own­ing real estate.
• Min­i­mum Invest­ment- Most DSD’s have a $100,000 min­i­mum for a 1031 exchange. This enables frac­tion­al own­er­ship of large insti­tu­tion­al assets. Cash investors may invest as lit­tle as $50,000.
• Hold­ing Peri­od- There’s typ­i­cal­ly a hold­ing peri­od of five to 10 years in the DSG. Ear­ly exits are gen­er­al­ly not allowed. How­ev­er, spon­sors depend­ing on val­u­a­tion of the DST may con­sid­er an ear­li­er exit.
• No Sec­ondary Mar­ket- Cur­rent­ly DST are an illiq­uid invest­ment. There is no active sec­ondary mar­ket for the DST. Investors need to be pre­pared to hold the prop­er­ty or their posi­tion in the prop­er­ty until the spon­sor decides to sell. This may be ref­er­enced as a full cycle event. How­ev­er, there is emerg­ing a lim­it­ed sec­ondary mar­ket. That may gain trac­tion over the com­ing years.
• Investor con­flict- Giv­en the fact that DST are gen­er­al­ly illiq­uid (like oth­er invest­ment styles and types) this may pre­vent cer­tain investors obtain­ing a DST.  How­ev­er, in the case of a 1031 exchange being uti­lized to build gen­er­a­tional wealth this may off­set the illiq­uid nature of the invest­ment. There is also no con­trol over the asset sale as pre­vi­ous­ly men­tioned.

Com­mon Asset Types in DSTs

Many of the same com­mer­cial asset class­es are found in DST. One of the biggest dif­fer­en­tia­tors between the DST and a reg­u­lar com­mer­cial asset is that DST’s are prepack­aged. And many options can be acquired. In a mat­ter of weeks. And it’s some­times days. As com­pared to. The tra­di­tion­al real estate acqui­si­tion, which may take months. In order to nego­ti­ate. Accept­able prices, sell con­di­tions, con­tin­gen­cies, etcetera. Here’s a par­tial list of the types of. DSD assets.

• Mul­ti­fam­i­ly Apart­ments
• Built for Rent Sin­gle Fam­i­ly Hous­ing
• Senior Hous­ing
• Stu­dent Hous­ing
• Man­u­fac­tured hous­ing
• Indus­tri­al Ware­hous­es
• Med­ical Office Build­ings
• Self-Stor­age Facil­i­ties
• NNN Retail (includ­ing nec­es­sary retail
• NNN Man­u­fac­tur­ing
• Life Sci­ence

Com­mon DST Vari­ants

1. Sin­gle-Asset DST – One prop­er­ty (e.g., an apart­ment com­plex).
2. Mul­ti-Asset DST – Port­fo­lio of prop­er­ties; helps with diver­si­fi­ca­tion.
3. Zero-Coupon DST – No cash flow dur­ing the term; used to off­set oth­er income via depre­ci­a­tion and inter­est deduc­tions.
4. Debt-Free DST – No mort­gage debt; suit­able for risk-averse investors or those exit­ing a debt-free prop­er­ty.

In Part Three will take a clos­er look at Sponsor’s respon­si­bil­i­ties and roles in the DST.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

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 §1031 Tax 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 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. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.