Delaware Statutory Trust Investments (DSTs)
Investors seeking to defer paying capital gain taxes on property often take the inviting route of §1031 of the Internal Revenue Code. Under §1031, an investor may defer paying capital gain taxes on property when they purchase “like kind” property within 45 days of selling the original property. The idea being, there has been no actual capital gained if a similar piece of property has been purchased so close to the sale of the original piece of property. Traditionally, investors have taken this route by way of Tenant-in-Common investments. However in recent years, a new beast has reared its head in the world of investment properties: the Delaware Statutory Trusts (DST’s).
Essentially a DST places the individual investor’s interest into a trust with other investors. Each investor then has an equal “beneficial interest” in the trust. The trust then purchases the “like-kind” property as a separate entity. The widespread popularity of DST’s can possibly be attributed to an easier ability to secure financing and its ability to attract more investors at a low minimum investment amount. For example, banks are much more likely to grant a loan to a trust than to an individual and in a DST an investor that has only a limited amount of funds may be in a trust with an investor with much higher funds, therefore making entry easier for the more financially restricted investor.The Seven Deadly Sins of DST’s
Unfortunately, when something seems too good to be true, it usually is, and DST’s are no exception to this rule. With the abovementioned benefits, comes the often unstated detriments, known in the financial industry as the “seven deadly sins” of DST investments. They are, as follows:
- No future equity contributions can be made to the DST once the offering is closed.
- DST’s cannot renegotiate the terms of the existing loans, or add new loans.
- DST’s cannot reinvest the proceeds from the sale of its investment real estate.
- The only capital expenditures the DST can make with respect to the property are those for normal repair and maintenance, minor non-structural capital improvements, and those required by law.
- Any cash the DST possesses between distribution dates can only be invested in short-term debt obligations.
- All cash, other than necessary reserves, must be distributed to the co-investors or beneficiaries on a current basis, and
- The Trustee cannot renegotiate the current lease or enter into a new lease.
Unlike TIC’s, in order for a DST to qualify as “like-kind” property, investors must hand over complete control of the property to a third party trustee. As a result, investors have no control over the property. Additionally, the only way the third party trustee can be liable to an investor is the high standard of “gross negligence” is met.
Under a DST, an investor is prohibited from entering into new leases or renegotiating current leases. This prohibition adds a layer of complexity, requiring the DST to enter into a ground lease for the property with a master tenant” who in turn enters into may smaller leases with tenants. The investments are also completely illiquid and there is no secondary market for beneficial interest in DST’s Assuming such a market even did exist, the sale of a DST interest would trigger capital gains tax- the exact thing investors hope to avoid.
Additionally, in many cases, initial fees associated with investment actually exceed the income tax deferred. Fees paid to the FINRA member brokerage firm or stock broker at a closing also increase the fees related to DST’s.Discuss Your DST Fraud Case with an Investment Fraud Lawyer
Like TIC investments, DSTs often carry with them substantial commissions to stock brokers and brokerage firms. Many of these commissions are not understood by investors or are not fully disclosed in the offering memorandum. Moreover, stock brokers and brokerage firms have an obligation to conduct due diligence regarding DST investments prior to recommending them to customers. Unfortunately, many stockbrokers do not take these obligations seriously and fail to conduct due diligence into DSTs prior to recommending them to their clients, who have relied on their investment professionals in deciding which product to invest in.
The knowledgeable securities fraud lawyers at Fitapelli Kurta are renowned for our skill and experience in representing individuals throughout the United States who have been harmed by broker malfeasance. Adept in both state and federal securities law, we have investigated and tried countless claims of misrepresentation, including many related to DST investments.
If you have invested in a DST and suspect your broker may not have acted with your best interests in mind, you may have a legal claim. Based in New York, the diligent stock fraud attorneys at Fitapelli Kurta can evaluate your claim, guide you through the process, and help you attempt to recover your lost investments. Call (877) 238-4175 or contact us online to speak to one of our experienced professionals at no cost to you.