We recommend marina owners begin preparing for an exit well in advance of the actual sale year, and one-year at a minimum. This allows ample time to make preparations to the property, your finances and “next steps” without hastily deciding the best course of action. The DST is a reinvestment vehicle that could be beneficial for owners who are interested in reinvesting marina sale proceeds into passively owned investments. Peter Marzo of Exchange-X explains what the DST is, the advantages/disadvantages, and how marina owners can benefit from this exit strategy.
The 1031 exchange is arguably the most advantageous tool when it comes to owning commercial real estate but comes with a price. That price, strict IRS guidelines and timelines to make even the most seasoned investors anxious. With 45-day identification and 180-day closing timeline requirements, a successful 1031 exchange can be more difficult than anticipated An increasingly popular option for 1031 exchange investors is the Delaware Statutory Trust or DST. What is a Delaware Statutory Trust (DST)
The Delaware Statutory Trust (DST) is a legal entity created under Delaware law that permits fractional ownership of real estate assets that may be used in a 1031 Exchange. Delaware Statutory Trusts (DST) are recognized as “like-kind” property, making them 1031 exchange eligible. For this reason, an exchanger can choose to defer taxes by investing in a DST rather than through a traditional fee-simple property.
DSTs are typically institutional grade properties managed by professional property management firms located in high barrier to entries markets. Property values can range from $5 million up to $1billion portfolios. Each DST property is pre-financed and pre-closed making the DST a popular option for 1031 exchange investors looking to acquire replacement property.
How do DSTs work?
A DST is formed by a sponsor firm, typically a large REIT, private equity, or development company for the purpose of holding real assets. From there, real estate is purchased by the sponsor firm, placed into the trust and equity is available for 1031 exchange or cash investment. Investors are “beneficial owners” and own an undivided fractional interest of the trust. DST properties are assigned an asset manager, typically the sponsor firm or a third-party management company to ensure the asset is being optimized. Upon the sale of the DST, investors can choose to exchange their interests into another DST or purchase a traditional fee-simple property.
Advantages & Disadvantages of Owning a DST
There are many advantages associated with owning Delaware Statutory Trust (DST) properties along with a few disadvantages. Some advantages include institutional grade properties, professional property management, flexible diversification, and a simple, efficient way to 1031 exchange. DST properties also have lower minimum investments typically starting around $25,000 and offer excellent asset/liability protection through non-recourse loans and default risk. Because DST properties are pre-financed and pre-closed, investors can alleviate risks associated with 1031 exchange closing and loan qualification risks. In addition, investor due diligence is consolidated into one document called the Private Placement Memorandum or PPM provided by the sponsor firm. At year end, tax reporting is simple with forms 1099, 1098 and P&L reports. Below is a full list of advantages.
There are a few disadvantages as well to consider before purchasing.
Loss of control – because DSTs are set up with a General Partner (GP) (sponsor) and Limited Partners (LPs) (investors), the LPs do not have voting rights or controlling interests.
Illiquid Investment – DST interest is considered an illiquid investment and there are no developed secondary markets. Upon purchasing a DST property, the sponsor firm will give a targeted investment time horizon which they intend to hold the property (avg. of five to seven years). A DST investor should always consider this objective and plan to hold their interests for the stated investment time horizon.
Does Lease-hold Interests Qualify?
For marina owners whose land is primarily or partially leased from a government agency, a 1031 exchange can still be elected with some additional rules. Fee-title investment real estate is the most common property type exchanged, but leasehold interests can be used in exchange transactions as well. The Internal Revenue Service classifies leasehold interest as “like-kind” if the leasehold itself is for 30 years or longer. This can include a 20-year term with two five-year renewal options.
Additional Uses: 1031 Backup & Boot
Two popular ways investors implement the DST into their 1031 exchanges are: as a 1031 Backup or a 1031 Boot Backup. Exchange-X is the nation’s leading 1031 exchange real estate investment platform for Delaware Statutory Trusts (DST) properties. The Exchange-X marketplace offers direct access to over 50 leading DST sponsors and dozens of active offerings. Our mission is to provide an all-in-one, comprehensive real estate investment platform to easily search, review, identify, and acquire institutional-grade replacement properties for 1031 exchange buyers. Since its inception, Exchange-X has transacted over $1 billion in real estate offerings on behalf of more than 700 investors. Our clients include 1031 exchange buyers, real estate owners/operators, investment groups, corporations, insurance companies, pension plans, and more.