Delaware Statutory Trust (DST) Risks
While a Delaware Statutory Trust (DST) owns the Property in fee simple, it offers (sells) “Interests” to Beneficial Owners, which allow them to exchange their relinquished property for Interests in the Trust in connection with a Section 1031 Exchange. The DST structure provides certain important advantages over a Tenant-in-Common structure. Some of the key advantages of owning property under the DST structure are the following:
- Non-recourse financing
- No personal liability for the debts and obligations of the entity
- No personal liability from any claims and demands of the Property whatsoever
- Lower transaction and administrative costs
However, Delaware Statutory Trusts (DSTs) also have certain disadvantages over a Tenant-in-Common structure. While this is not an exhaustive list, some of the Risks include:
- Beneficial Owners Possess Limited Control and Rights –The Trust is operated and managed solely by the Trustee and the Manager. Purchasers, as Beneficial Owners, will have no right to participate in any aspect of the operation or management of the Trust. The Trustee and the Manager will not consult with the Beneficial Owners when making any decisions with respect to the Trust and the Property, including whether to sell the Property or effectuate a Transfer Distribution.
- Beneficial Owners Do Not Have Legal Title – The Beneficial Owners will not have any right to seek an in-kind distribution of the Property or divide or partition the Property. The Beneficial Owners do not have the right to sell or cause the sale of the Property.
- Trustee and the Manager Have Limited Duties to Beneficial Owners – The Trustee will only be liable to the Beneficial Owners for willful misconduct, bad faith, fraud or gross negligence.
- Trustee and the Manager Have Limited Powers and the Trust May Face Increased Risk in order to comply with the tax law regarding investment trusts and Section 1031 Exchanges. The Trustee and the Manager are expressly prohibited from taking a number of actions, including the following –
- Obtain Additional Funds Through Additional Borrowings or Additional Capital
- Selling, transferring or exchanging the Property except as required or permitted under the Trust Agreement.
- Reinvesting any monies of the Trust, except to make permitted modifications or repairs to the Property or in short-term liquid assets.
- Renegotiating the terms of the Loan or entering into new financing, except in the case of the bankruptcy or insolvency of the Master Tenant or another tenant.