Owning commercial real estate can take several forms. An investor might purchase a property directly, make the major decisions, oversee financing, and remain closely involved with the asset. Another investor might choose a Delaware Statutory Trust, or DST, and own a fractional interest in commercial real estate without taking on the same day-to-day responsibilities.
Both approaches provide exposure to commercial real estate, but the ownership structure, level of control, management responsibilities, liquidity, financing, and 1031 exchange considerations can be very different.
For investors selling an existing investment property, those differences can become especially important. The replacement property selected during a 1031 exchange may affect how involved the investor will be with their real estate going forward, what type of property they can access, and how much direct control they retain.
Table of Contents
- DST vs. Direct Real Estate Ownership at a Glance
- How Ownership and Control Differ
- Management Responsibilities and Time Commitment
- Capital, Financing, and Access to Commercial Real Estate
- DSTs, Direct Ownership, and 1031 Exchanges
- Risk, Liquidity, and Important Trade-Offs
- Which Ownership Structure Aligns With Your Priorities?
- Explore Commercial Real Estate Opportunities With CAI Investments
- Frequently Asked Questions
DST vs. Direct Real Estate Ownership at a Glance
The biggest difference between a DST and direct commercial real estate ownership comes down to how the investor owns the property.
With direct ownership, an investor or an entity controlled by the investor generally owns the commercial property itself. Depending on the ownership arrangement, the investor may have authority over leasing, financing, improvements, property management, the timing of a sale, and other major decisions.
With a Delaware Statutory Trust, multiple investors can purchase beneficial interests in a trust that owns real property. Under the structure described in IRS Revenue Ruling 2004-86, qualifying DST interests can be treated as ownership of an undivided fractional interest in the underlying real property for federal tax purposes. This can allow an eligible DST interest to serve as replacement property in a Section 1031 exchange when the other requirements of Section 1031 are satisfied.
How Ownership and Control Differ
For some commercial real estate investors, control is one of the most important considerations.
A direct owner typically has much more authority over what happens with a property. Depending on any partnership agreements, loan terms, leases, and other contractual restrictions, the owner may be able to decide when to refinance, make improvements, negotiate leases, change property managers, reposition the asset, or put the property on the market.
That control can be valuable for investors who want to remain actively involved.
It also comes with responsibility.
If a tenant leaves, the owner may need to decide how the property will be marketed and how much capital should be spent preparing the space for another tenant. If major repairs are needed, the owner must determine how they will be funded. If refinancing becomes necessary, the owner or ownership entity must work through that process.
A DST works differently.
DST investors generally do not make individual decisions about leases, financing, renovations, or the sale of the property. Those responsibilities are handled through the trust and its management structure.
That limited investor control is not simply a convenience feature. The structure described by the IRS places restrictions on certain activities of the DST trustee. For example, Revenue Ruling 2004-86 describes limits related to renegotiating financing, entering new leases outside specific circumstances, reinvesting proceeds, and making more than minor non-structural property modifications.
For an investor who wants direct authority over a commercial property, that may be an important limitation.
For someone intentionally looking to reduce their personal involvement in property-level decisions, the same feature may align more closely with what they are trying to accomplish.
Management Responsibilities and Time Commitment
Direct commercial real estate ownership does not automatically mean an investor must personally handle every repair, rent payment, or tenant request. Property managers, leasing brokers, accountants, attorneys, contractors, and other professionals can handle much of the day-to-day work.
Even with third-party management, however, the owner remains responsible for the asset at a higher level.
There may still be decisions involving:
- Lease negotiations and renewals
- Tenant improvements
- Capital expenditures
- Property taxes and insurance
- Repairs and maintenance
- Property-management oversight
- Financing and refinancing
- Legal or compliance matters
- Vendor contracts
- Property improvements
- Potential vacancies
- The timing of a future sale
For experienced commercial real estate owners, that level of involvement may be familiar and intentional. Some investors want to remain closely connected to the property and actively participate in decisions that could affect its performance.
Others reach a point where they no longer want that responsibility.
This can be particularly relevant for someone who has spent years owning and managing commercial real estate and is now evaluating what should happen after the sale of a property.
A DST provides a more passive form of real estate ownership.
The individual investor is not responsible for collecting rent, finding contractors, negotiating directly with tenants, or overseeing routine property operations. The property and investment structure are managed on behalf of the beneficial owners.
Passive does not mean risk-free.
DST investors depend heavily on the sponsor, property structure, tenant performance, financing, property management, and decisions made on behalf of the trust. Investors also give up much of the direct control they would have if they owned the property themselves.
The distinction is therefore less about whether one structure requires “work” and more about who has responsibility for managing the commercial real estate and making major decisions.
Capital, Financing, and Access to Commercial Real Estate
The amount of capital required can also create a meaningful difference between DST ownership and direct ownership.
Buying an entire commercial property typically means purchasing the full asset, either individually or through an ownership group. The investor may need to provide a significant amount of equity and arrange any necessary financing.
That can concentrate a large amount of capital in one property.
For example, purchasing an industrial facility, retail property, medical building, or other large commercial asset directly may require more equity than an investor wants to place into a single transaction.
Fractional ownership through a DST changes the equation.
Instead of purchasing an entire property, an investor purchases a beneficial interest in the trust. This can provide access to a share of a larger commercial property without requiring the investor to acquire the entire asset.
The minimum investment varies by offering, and investors should review the applicable private placement memorandum and offering documents for the specific terms, fees, risks, financing structure, and requirements.
This fractional structure can also give some investors the ability to allocate capital across more than one property or DST rather than placing all available exchange proceeds into one asset.
That does not automatically create a diversified portfolio.
A DST may own one property, and investing in a single DST can still create significant exposure to a particular tenant, market, property type, or asset. Investors interested in diversification need to look at the actual properties, tenants, geography, industries, financing, and structure of their investments rather than assuming fractional ownership alone creates diversification.
Direct ownership can also provide diversification when an investor owns multiple properties, but doing so may require substantially more capital and management.
Financing creates another distinction.
With direct ownership, the investor typically takes an active role in obtaining a loan, negotiating terms, reviewing debt options, and managing future refinancing.
With a DST, financing, when used, is generally established as part of the offering rather than negotiated separately by each individual investor.
That can reduce one layer of work for the DST investor, but it also means the investor has far less ability to modify the financing later.
DSTs, Direct Ownership, and 1031 Exchanges
One reason DST ownership frequently comes up in conversations about direct real estate ownership is Section 1031 of the Internal Revenue Code.
A qualifying 1031 exchange may allow an investor to defer recognition of certain gains when exchanging real property held for investment or productive use in a trade or business for qualifying like-kind real property. Since the Tax Cuts and Jobs Act, Section 1031 generally applies to real property rather than personal or intangible property.
An investor completing a 1031 exchange does not have to use a DST.
Directly owned commercial real estate can serve as replacement property when the transaction and property satisfy the applicable 1031 requirements.
For example, an investor selling one commercial investment property may identify and acquire another qualifying investment property.
A DST can provide another potential path.
IRS Revenue Ruling 2004-86 concluded that, under the facts described in the ruling, a taxpayer may exchange qualifying real property for an interest in a DST without recognition of gain or loss under Section 1031 when the other requirements of Section 1031 are satisfied.
This has made DSTs one option for investors who want to remain invested in commercial real estate without directly purchasing and managing another entire property.
Timing is especially important.
In a typical deferred 1031 exchange, replacement property generally must be identified within 45 days after the relinquished property is transferred.
The replacement property generally must then be received by the earlier of:
- 180 days after the relinquished property is transferred, or
- The due date of the investor’s federal income-tax return for the year of the transfer, including extensions.
The 45-day identification period and 180-day exchange period generally run at the same time rather than one beginning after the other.
For an investor looking for another directly owned commercial property, that timeline can mean researching markets, reviewing financials, negotiating purchase terms, arranging financing, completing inspections, performing due diligence, and closing within the exchange window.
DST offerings may provide an alternative because the commercial property, ownership structure, financing arrangements, offering materials, and other transaction elements have already been assembled before an investor subscribes.
That does not eliminate the need for due diligence.
Investors still need to review the individual offering, property, tenant, lease structure, financing, sponsor, fees, risks, potential conflicts, and other relevant information. Tax and legal advisors should also be involved when evaluating whether a particular investment and transaction satisfy 1031 requirements.
Risk, Liquidity, and Important Trade-Offs
The decision between a DST and direct commercial real estate ownership should not be based only on convenience.
Both structures carry meaningful risks.
With directly owned commercial real estate, the investor may face risks tied to:
- Declining property values
- Tenant vacancy or default
- Unexpected repairs
- Capital expenditures
- Changes in local market conditions
- Interest rates and refinancing
- Property taxes and insurance
- Leasing costs
- Environmental or regulatory issues
- Concentration in a single asset or market
The advantage of having greater control also means the investor is responsible for responding to many of these issues.
DST ownership has many of the same underlying real estate risks because the investment is still tied to commercial property. However, the structure creates additional considerations.
Limited control: Individual beneficial owners generally cannot independently change the property’s financing, leasing strategy, management, or sale timing.
Illiquidity: DST investments are generally illiquid. CAI’s current disclosure states that these investments do not have a secondary market where an investor can readily sell an interest before the underlying property is sold.
Reliance on others: Investors rely on the sponsor and other parties responsible for managing the trust and underlying property.
Property and tenant risk: A decline in property value, loss of a tenant, property damage, or other changes may affect investment performance and distributions.
Fees and expenses: Offering expenses, management-related costs, financing costs, and other fees may affect overall investment results. The specific costs should be reviewed in the offering documents.
Structural restrictions: DST rules can limit how management responds to certain changing circumstances compared with a direct property owner who may have greater flexibility.
These differences make due diligence especially important.
Investors should review the applicable private placement memorandum, property information, tenant financial information when available, lease terms, financing, fees, projected holding period, risk factors, and sponsor information before making an investment decision.
CAI’s own disclosures also emphasize that commercial real estate investments can lose value, financed properties can face foreclosure risk, distributions may be reduced or suspended, tax treatment can change, and fees may affect investment results.
Which Ownership Structure Aligns With Your Priorities?
There is no single ownership structure that fits every commercial real estate investor.
The more useful question is what the investor wants their next real estate investment to look like.
Someone considering direct commercial real estate ownership may place greater importance on:
- Selecting the exact property
- Controlling financing decisions
- Managing leasing strategy
- Making improvements or repositioning an asset
- Choosing when to refinance
- Determining when the property should be sold
- Maintaining direct involvement with the investment
Someone evaluating a DST may place greater importance on:
- Reducing day-to-day property responsibilities
- Owning a fractional interest rather than an entire property
- Accessing commercial properties through a passive structure
- Avoiding direct responsibility for property management
- Evaluating an additional type of replacement property during a 1031 exchange
- Transitioning away from active ownership
The trade-off is important.
An investor moving from direct ownership to a DST is generally exchanging a significant amount of control for a more passive ownership structure.
An investor choosing direct ownership retains greater control but also remains responsible for more of the decisions and obligations surrounding the property.
Neither eliminates commercial real estate risk.
The property itself still matters. So do the tenant, lease, market, financing, purchase price, expenses, property condition, location, and long-term demand.
Ownership structure is one piece of the decision, not a substitute for evaluating the underlying commercial real estate.
Explore Commercial Real Estate Opportunities With CAI Investments
Choosing between a DST and direct commercial real estate ownership starts with understanding what each structure actually requires from the investor.
For someone completing a 1031 exchange, the decision may also need to happen within a limited window, making it important to begin evaluating potential replacement-property options early.
CAI Investments is a Las Vegas-based real estate investment company with a vertically integrated platform that finances, develops, and manages commercial properties across the United States. CAI’s portfolio has included DST offerings as well as industrial, hospitality, office, retail, and other commercial real estate assets.
If you are evaluating commercial real estate opportunities or considering whether a DST may fit into your 1031 exchange, contact CAI Investments to learn more about available opportunities and the commercial properties behind them.
Investment decisions should be based on the applicable offering documents and an investor’s individual circumstances. Commercial real estate investments involve risk, including the possible loss of principal. Investors should consult their tax, legal, and financial professionals before making investment or 1031 exchange decisions.
Frequently Asked Questions
1. Is a DST the same as directly owning commercial real estate?
No. With direct ownership, an investor generally owns the property directly or through an entity they control and retains greater authority over property-level decisions.
With a DST, an investor owns a beneficial interest in a trust that owns the underlying commercial real estate. The investor does not typically manage the property or make individual decisions involving leasing, financing, improvements, or the timing of a sale.
For federal tax purposes, qualifying DST interests structured consistently with IRS guidance may be treated as an undivided fractional ownership interest in the trust’s real property.
2. Can a DST be used in a 1031 exchange?
Certain DST interests can potentially qualify as replacement property in a Section 1031 exchange.
IRS Revenue Ruling 2004-86 established that an interest in the type of Delaware Statutory Trust described in the ruling can qualify under Section 1031 when the other requirements of the exchange are satisfied.
Not every transaction automatically qualifies. Investors should work with qualified tax and legal professionals when completing a 1031 exchange.
3. Is DST ownership more passive than direct real estate ownership?
Generally, yes.
DST investors do not typically handle daily property operations, tenant management, repairs, lease negotiations, financing, or other property-management responsibilities.
A direct owner can hire professional property management, but the owner still retains responsibility for major decisions and oversight of the asset.
That makes a DST a more passive ownership structure, but it also means the investor gives up much of the control associated with directly owning commercial real estate.
4. Can a DST investor sell their interest whenever they want?
DST investments are generally considered illiquid.
Unlike publicly traded investments, there is typically no established secondary market where investors can readily sell their beneficial interests. The investor may need to remain invested until the underlying commercial property is sold or another liquidity event occurs.
Holding periods can vary based on the property, offering, market conditions, and other factors. Investors should not assume a DST interest can be quickly converted to cash and should review the liquidity provisions and risks in the specific offering documents.
5. Is a DST better than direct commercial real estate ownership?
Neither structure is automatically better.
Direct ownership may be more appropriate for an investor who values control over the property, financing, leasing, improvements, and sale decisions.
A DST may be worth evaluating for someone who wants commercial real estate exposure while reducing personal involvement in property management or who is considering different replacement-property options during a 1031 exchange.
The right structure depends on the investor’s objectives, liquidity needs, desired level of involvement, risk considerations, tax situation, and the specific commercial real estate being evaluated.
Before choosing either approach, investors should evaluate the underlying property and structure carefully and discuss the potential tax, legal, and financial effects with qualified professionals.