In the world of DST (Delaware Statutory Trust) investments, there are seven prohibited activities that investors must be aware of. These activities, outlined in IRS Revenue Ruling 2004-86, are designed to ensure that beneficiaries are treated as acquiring a direct interest in real estate for tax purposes. Let’s take a closer look at these sins:

 

No Future Contributions

Once the offering is closed, no additional contributions can be made to the DST by current or new beneficiaries. This ensures that the investment remains static and does not change over time.

 

No Loan Renegotiation or New Borrowing

The trustee is prohibited from renegotiating the terms of existing loans or borrowing any new funds, unless there is a loan default resulting from a tenant bankruptcy or insolvency. This restriction aims to maintain the stability of the investment structure.

 

No Reinvestment of Proceeds

The trustee cannot reinvest the proceeds from the sale of its real estate. This prevents the funds from being used for any other purpose and ensures that the investment remains focused on the original property.

 

Limited Capital Expenditures

The trustee is only allowed to make capital expenditures for normal repair and maintenance, minor non-structural improvements, and those required by law. This restriction prevents excessive spending and ensures that the property is well-maintained.

 

Restricted Cash Investments

Any reserves or cash held between distribution dates can only be invested in short-term debt obligations. This ensures that the funds are not tied up for an extended period and can be accessed when needed.

 

Mandatory Cash Distribution

All cash, except for necessary reserves, must be distributed on a current basis. This ensures that investors receive their share of the profits in a timely manner.

 

Limited Lease Activities

The trustee cannot enter into new leases or renegotiate existing leases, unless there is a need due to a tenant bankruptcy or insolvency. This restriction prevents unnecessary changes to the lease agreements and maintains stability for the investors.

To mitigate the impact of these restrictions, sponsors of DST investments focus on acquiring new or recently rehabilitated Class A properties. They also raise substantial funds for capital reserves, ensure financing terms that align with the investment timeline, and plan for the sale of the mortgaged property before the loan maturity date.

Additionally, a “springing LLC” provision can be included in the trust agreement to address potential loan defaults. This provision allows for the conversion of the DST into an LLC if the trustee determines that the property is in danger of being lost due to a loan default. This “springing LLC” provides more flexibility for the trustee to take necessary actions to protect the investment.

 

Conclusion

DST investments offer a simplified structure for investors, shielding them from liabilities and removing the need for involvement in property operations. By understanding and adhering to the seven prohibited activities, investors can navigate the world of DST investments with confidence.