The Delaware Statutory Trust (DST) is a formal legal structure recognized by the IRS to take advantage of 1031 property exchanges.  To maintain its IRS-granted status, the Trustee who manages the DST must avoid the following:

• The Trustee of a DST is not allowed to request, require, or permit future equity contributions, either by current or new beneficiaries once the offering is closed.
  • This “Sin” prevents capital calls from current owners or creating a new offering for capital on the same property because it could dilute your ownership of the DST.
  • Note, that should a current owner of the DST die, ownership assets may be passed to new beneficiaries without a dilution of ownership to other DST owners.
• The Trustee of a DST is not allowed to borrow new funds or renegotiate the terms of the existing loan once the offering is closed.
  • Even though a loan on a DST property is non-recourse (which means the DST owner has no liability for the loan), changing existing or adding more debt on a property could negatively affect investment returns.
  • It also means that once a loan is in effect and the DST begins collecting investments, changing the debt could impact an investor’s IRS-required debt replacement amount for their 1031 exchange.
• The Trustee of a DST is not allowed to retain or reinvest any sales proceeds from the sale of a DST.
  • All proceeds must be distributed back to the owners of the DST.  Individuals may elect to roll all proceeds over to a new DST or other 1031 exchange, roll over a portion of the proceeds, or cash out.  DST owners are encouraged to consult professionals to determine the tax consequences of each decision.
• The Trustee of a DST is not allowed to make major capital improvements to the DST property.
  • However, the Trustee may make capital expenditures for normal repair and maintenance, minor non-structural improvements, and those required by law.
  • This is ostensibly to prevent the DST from becoming an investment tool for huge capital gains which the IRS could not tax due to 1031 rules.
  • This “Sin” also prevents #1 above from occurring.
• The Trustee of a DST is not allowed to speculate with any liquid cash coming into the DST.
  • The Trustee may invest in short-term debt obligations as a holding tool to increase, if only in a minor amount, the value of the DST.
• The Trustee of a DST is not allowed to withhold rents or proceeds that are allocated for distributions.
  • The Trustee is allowed to keep a cash reserve for DST expenses.  These reserves are typically set forth in the Private Placement Memorandum for disclosure purposes.
• The Trustee of a DST is not allowed to renegotiate current leases or enter into new leases.
  • This encourages a DST to work with creditworthy tenants on a triple net basis.
  • The IRS allows for an exception to this rule in the case of bankruptcy or insolvency of the property tenant.

Thus, the use of a DST will generally be limited to long-term “A” credit Triple-net leased properties (a “box-in-one”) or properties leased to an affiliate of the Sponsor who will operate the property on a triple-net-basis (a “master lease”).