Summary
A Delaware Statutory Trust (“DST”) is a business trust that can be used for real estate ownership where a trustee holds title to assets for the benefit of the trust interest owners. Each owner has a “beneficial interest” in the DST for federal income tax purposes and is treated as owning an undivided fractional interest in a property or several properties. As such, a DST meets the criteria to qualify for a §1031 Exchange.
A trustee (typically an affiliate of the sponsor) manages, administers and operates the trust for the benefit of the investors pursuant to a Trust Agreement. Benefits of the DST structure for both the exchanger/beneficiary and lenders (if a property is financed), include, among others:
The DST shields the exchanger from any liabilities with respect to the property (i.e., non-recourse to the investor).
The lender makes only one loan to one borrower (the DST).
DSTs are bankruptcy remote (i.e., creditors of the exchanger cannot affect the DST).
Investors have no operational control over the management of the DST or its property. Consequently:
Lenders do not need to perform due diligence on individual exchangers, and
Exchangers are not required to sign any indemnifications or guarantees.
DST Market Size Today
Mountain Dell (an industry recognized reporting firm) reported that the total equity raised for 1031/DST transactions in 2023 was $5.04 billion for the sponsors they survey, down meaningfully due to interest rate volatility and general apprehension towards purchasing assets at in-place pricing during a volatile interest rate environment. The potential of the market is significant as wealth managers become more familiar with tax-advantaged real estate and more institutional sponsors are coming into the space.
Data above provided by Mountain Dell Consulting and is as of 1Q2024.
Potential Size of the DST Market
An intergenerational transfer of wealth is in motion in America — and it will dwarf any of the past. Of the 73 million baby boomers, the youngest are turning 60; the oldest boomers are nearing 80. In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation; by 2023, that wealth had more than tripled, reaching $140 trillion. Of the $84 trillion projected to be passed down from older Americans to millennial and Gen X heirs through 2045, $16 trillion will be transferred within the next decade – much of that will be real estate (Silent Generation and Baby Boomers hold $24 Trillion).
Conclusion
While the DST market has seen impressive growth since the Great Financial Crisis of 2008, RCX believes we are still in the early stages of DST market growth. The amount of wealth held in investment real estate that must be transferred to the next generation is staggering, and the current levels of DST equity raise barely scratch the surface of the potential. RCX believes the DST market will continue to grow as (a) investors learn it is possible to 1031 exchange into a DST, (b) investor understand the many benefits of the DST structure and (c) as investment advisors and CPAs become more familiar with the DST solution for their clients.
RCX believes the sources relied upon herein are reliable, but takes no responsibility for its accuracy.
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