DSTs – How are they funded
Due to the nature and structure of Delaware Statutory Trusts (DSTs), it is important for investors to know how they are funded. Investors also need to know the restrictions and rules regarding the funding of DSTs and the timing on such funding. These are important aspects for investors to note when evaluating or looking into investing into a DST.
The following are some things to note about how DSTs are funded:
DSTs are commonly funded either before or after the acquisition of the property
Two common methods for funding DSTs are either pre-acquisition or post-acquisition of the property or properties. For the pre-acquisition method, the DST’s sponsor has to raise funds from investors prior to the acquisition of the property desired. This means that the sale of the property to the DST cannot close until the DST has met the required investment levels. This also means that investors will not know the exact property or properties that will be held and eventually managed by the sponsor. This is something that investors should look into when evaluating or looking into DSTs.
According to the DST’s trust agreement, a sponsor may have specific regions and/or types of properties (e.g. residential or commercial) that it must select from after the financing requirements are met. This can serve as some form of assurances for investors who might be interested in a specific DST. Nevertheless, there is more risk involved when DSTs are financed pre-acquisition of the property or properties since the investment will then be subject to the DST actually closing on and acquiring properties.
Although investors will be able to evaluate DSTs better and more confidently if the DST is funded post-acquisition, this usually results in higher up front fees that must be paid when an investor decides to invest in the specific DST. In any event, investors need to be aware of how a given DST is funded in order to make the best investment decision.
DSTs cannot raise or receive additional funds after the offering period ends
DST trustees have limitations on dealing with debts and leases
Additionally, depending on how the trustee has structured the leases with the tenants, trustees may have to renegotiate or restructure the leases if a tenant defaults or files for bankruptcy. Some DSTs may decide to circumvent this need to renegotiate or restructure tenant leases by using a master lease to handle the tenants.
Investors may directly invest in a DST or use a 1031 like-kind exchange
As noted earlier, any investments made by investors, either directly or through the use of 1031 like-kind exchanges, will need to be made during the offering period. Once the offering period ends, however, no additional investments and funds may be received by the DST.
Any reserves or cash held by the DST may only be invested in short-term obligations
Whether or not a debt is short-term will typically be within the discretion of the trustee and/or sponsor. Additionally, the trust document governing the specific DST may also provide a definition for short-term obligations or may provide guidelines to help the trustee or sponsor decide whether the investment is short-term.
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