Pros and cons of investing in DST for 1031 exchange buyers

A DST is a Delaware Statutory Trust created under Delaware state law. The DST structure, however, is used by few triple net NNN property 1031 exchange investors as a form of ownership to own fractional interests in investment-grade NNN property, nationally.  Each owner is treated as owning an undivided fractional interest.  Each investor receives their percentage share of tax benefits, appreciation and income, from the entire property.  While DSTs have advantages of simplicity and quick satisfaction of 1031 exchange needs, they lack investor control and are highly illiquid. Witness the following pros and cons for a 1031 net lease investor:

PROS

DST style passive NNN property ownership affords investors the opportunity to diversify their real estate holdings by asset class, sector, geography and other cross-sections.

DSTs qualify as “like-kind” 1031 exchange property, giving NNN investors the ability to conveniently 1031 exchange upon both the entry into the property as well as exit upon sale of the DST.

DSTs can be useful when an investor is in an upcoming 1031 exchange as properties can usually be closed on in 3-5 business days.  DST property investments are able to close quickly, due to the properties being “ready-to-go”, saving investors from missing any deadline to defer capital gains tax.

A NNN lease property investor can invest using DSTs that are debt-free with no mortgage. This means cash-only DST properties will not carry mortgage risk, refinancing risk and can never be foreclosed. 

CONS

One major disadvantage of the DST ownership structure is a loss of control. The trustee/investment manager will be making all investment as well as any property management decisions. This can be a big negative consideration for 99% of  NNN 1031 investors.

Two, DST 1031 properties are only available to accredited investors with a net worth of over $1.0MM and, to accredited entities (assets of greater than $5.0MM).

Three, while it is possible for a NNN 1031 investor to sell their beneficiary interest in a DST, there will not be a high demand or an active secondary market. As such, 1031 triple net lease investors are likely to get unfavorable pricing or terms on the premature sale of their DST interest. DST investors should be prepared to have their investment locked for the life of the trust.

Four, a massive disadvantage of the DST is that once the offering is closed, the trust cannot raise any new money, even from existing investors. This can affect return expectations of a 1031 net lease investor, such that a certain amount of reserves may need to held back for DST capital needs, as opposed to going directly into a investment opportunity for the DST.

Thus, DST may be a good choice ONLY for new, inexperienced, NNN investors, who want the exposure to an alternative investment class such as real estate, but not for the majority of net lease investors who are experienced, savvy, 1031 or 1033 NNN investors who have a slew of trusted advisors, know the 1031 process intimately and have the expertise and time to take on active NNN investment management.

Call your expert brokers at the Triple Net Investment Group for outstanding advice on the purchase or disposition of 1031 net lease assets, today. With our extensive track record in consummating DST, 1031 exchange and other types of complicated NNN transactions, you can be sure of reliable, repeatable success in your acquisition or disposition.