DST Ownership – 1031 Exchange Opportunities

DST real estate ownership might help provide investors with opportunities in their 1031 Exchange. Many real estate investors have yet to learn about an alternative option they can use to help complete a 1031 exchange called a Delaware Statutory Trust Real Estate Investment, which is commonly referred to as a DST.

A properly structured 1031 DST allows an investor to sell an investment real estate asset, defer the income
taxation on the sale through Internal Revenue Code Section 1031, and buy a DST replacement property
on a tax-deferred basis. A 1031 DST is a legal Trust structure that is created under Delaware law, designed
to qualify as Qualified Replacement Property to satisfy IRS replacement property rules in a 1031 tax-deferred
exchange, as provided in IRS Revenue Ruling 2004-86. A DST has a legal Trust document, a Trustee, beneficiaries, assets, responsibilities, rules, and procedures. A DST can provide potential benefits for many individuals, but like all Trusts, will not be suitable for everyone. The basic legal structure of a DST is to fund assets into the Trust, have a Trustee provide guidance and property management, and distribute income to beneficiaries.

The DST investor will own a portion of the Trust, called a Beneficial Ownership Interest, with the Trust owning
the underlying real estate. There will be multiple DST owners and each will own their own percentage of
the Trust. A DST investor is called a DST Beneficiary. This means that the investor receives the potential
economic benefits of the DST. The actual ownership is evidenced by a Purchase Agreement and Executed
Trust Documents. For 1031 tax-deferred exchange and income tax purposes, the investor is viewed by the IRS
to own the real estate directly. For all other purposes, the investor is seen as a passive participant.

It is important to realize that a DST investor must follow all Internal Revenue Code Section 1031 tax-deferred
exchange laws, including the requirement that the DST replacement property be identified within 45 days of
close of escrow of the original property sale, and the DST replacement property purchased must close escrow
within 180 days. While the 45-day and 180-day rules are the same as a standard 1031 exchange, investing
in a DST as a 1031 replacement property can help real estate owners locate suitable replacement properties
efficiently (as this alternative can provide investment options beyond what are available to the investor if he
or she had invested in real estate directly).

It is equally important for a DST to follow all aspects of Revenue Ruling 2004-86, issued in 2004, to qualify as a
1031 Qualified Replacement property. This ruling allows real estate investors, in many cases, to exchange out of
individually owned and self-managed property, on a tax-deferred basis using a 1031 exchange, into a Beneficial
Interest of a Trust that owns investment-grade real estate. In many cases, the real estate owned by the Trust
is a larger, higher-investment-grade property, and is managed by a team of real estate property management
professionals. Title insurance will be issued on the real estate assets purchased by the Trust. Examples of DST real estate could include office buildings, shopping centers, apartment buildings, industrial properties,
warehouses, raw land, and even oil and gas interests.

Each DST owner receives a proportionate share of net income, income tax deductions, and appreciation or
value loss of the DST property based on their individual Beneficial Interest ownership percentage. If a DST
investor owns a 5.00% Beneficial Interest in the Trust, he or she will receive 5.00% of the economic outcome
of the Trust asset performance, meaning he or she receives 5.00% of the net income or losses, 5.00% of the
income tax deductions, and 5.00% of the appreciation or losses.

The DST property can provide the investor with net rental cash flow opportunities that traditionally have
compared favorably with individually owned and self-managed properties. It is very important to understand
that rental cash flow outcomes vary from program to program depending upon the real estate market
where the property is situated and associated property occupancies and that net rental cash flow is not
guaranteed. The investor is no longer required to manage the property, nor is he or she personally liable for the
debt. The DST property is managed by an experienced management company. The investor is passive and is
not required to participate in any decisions regarding the property: no tenants, no toilets, no telephone calls,
no trash, and no time commitments.

Investing in a Delaware Statutory Trust – DST property carries significant risks, including but not limited to
market risk, liquidity risks, income risks, principal, risks, due diligence failure risks, and income tax risks. There is no guarantee that DST net income will flow to an investor as originally projected, and there is no guarantee that a DST property will appreciate in value, or that it won’t go down in value. DST investments are illiquid assets, and there is currently no established secondary market.

There are loads, fees and expenses associated with every DST investment which must be considered before
any investment is made in a DST. For information about the investment risks and fees associated with DST
investments, please see the section of this document titled “DST RISKS, FEES, Rules and Restrictions”.

Once the sale of the original property is finalized, as previously stated, the investor has 45 days to locate and
identify one or more suitable DST investment properties. In this regard, an established financial advisor or
registered representative, who has experience in DST investments, can be very useful in helping the investor
to locate a property that makes sense from a standpoint of economics and due diligence. In many cases, such a
property might be one that is:

  1. High-quality, investment-grade real estate
  2. Office, retail, apartment, or industrial use
  3. Generating competitive cash flow from established corporate tenants
  4. Managed by a professional property manager
  5. Reviewed by a reputable third-party due diligence analyst and/or law firm
  6. Offered by a reputable DST Sponsor with competitive fees and an established track record
  7. Reasonably financed with a suitable debt-to-equity ratio

DST 1031 Real Estate Investments are structured by “Sponsors”. The Sponsor will establish an Affiliate
to serve as the “Trustee” of the DST to manage the transaction from start to finish. As such, investors will not
deal with the property tenants on a day-to-day basis or assume any responsibilities for property management.
The DST is therefore a suitable opportunity for those who want to invest in real estate on a passive basis
(but unsuitable for those who want to be involved in property management).

Individuals who are ready to relinquish the day-to-day burdens of being a landlord, or who own land and would
like an income-producing property, can potentially benefit from the DST structure.