What is the duration of the investment period and what occurs when the investment is sold?
The investment period, also known as the hold period, refers to the time from when the DST interest is acquired to when the DST completes its exit through a sale. Typically, the exit involves selling the property to another buyer, providing liquidity to the DST investors. The length of the hold period can vary based on factors such as the type of asset in the DST, the loan term, market demand, and the overall economy.
In commercial real estate, it is common for properties to have 10-year loans for financing, and this timeframe is often used for properties held in a DST as well. Since the DST cannot refinance its debt once the offering is completed, it is logical for the DST to aim for an exit before the loan matures. However, the specific length of time a DST property should be held can vary. DST sponsors want to maximize the property’s appreciation potential while ensuring the loan is paid off. Offering materials for DSTs often project a hold period of 7-10 years, allowing the property to increase in value while providing a window of time to prepare for sale and execute it before the loan term ends. Typically, aiming for a full-cycle exit in years 7-9 is reasonable. This timeframe allows for maximum appreciation and the ability to overcome the front-end load of the DST transaction through increased property value.
For all-cash DSTs that do not involve leverage or loans, there is greater flexibility in deciding when to execute the exit strategy. These all-cash DSTs can hold the property for as long as desired without the pressure of a loan maturity date. While all-cash DSTs may not provide as high total returns as leveraged DSTs, the absence of loan maturity allows for lower risk and peace of mind for investors.
During the hold period, DST investors can expect a passive investment experience. They do not need to manage the property, negotiate leases, or handle maintenance tasks. This passive structure allows DST investors to allocate their time and energy to other interests and activities, such as spending time with family, pursuing hobbies, traveling, or simply relaxing. Active management of the properties is not required, giving investors more freedom to focus on other aspects of their lives.
DSTs generally provide monthly distributions to investors. Most investors choose to receive these distributions through electronic deposit directly into their bank accounts, ensuring efficiency and ease. However, physical checks can also be arranged for delivery. Monthly distributions align with the cash flow generated by the property and pass through the master lease structure to the investors. Typically, distributions are made between the 5th and 15th of the month following the month the income is earned.
Quarterly reports are provided by DSTs to keep investors informed about the financial status of the property and any factors that may impact its performance. These reports include a summary of year-to-date performance, comparing projected and actual expenses and income levels, reserve status, occupancy rates, current distribution rates, and upcoming short-term projects affecting the property. The reports provide visibility into the investment’s performance and a forward-looking overview of the next few months of operations.
At the end of the year, DSTs provide investors with tax information necessary for filing taxes. These annual tax documents, along with the distributions and quarterly reports, are the primary forms of communication investors receive during the hold period. The aim is to deliver the annual tax documents by February 15th, allowing investors ample time to prepare their tax returns. In some cases, there may be delays due to circumstances beyond the sponsor’s control, resulting in delivery in March or April.
The sponsor of the DST will decide when it is an opportune time to sell the property after a certain number of years. The sponsor’s internal real estate professionals or external commercial real estate brokers continuously monitor the local market and CAP rate movement for the asset class. They strive to sell the property at the best time to maximize investor returns. Unsolicited offers for the property may also be received, which could be mentioned in the monthly or quarterly reports. However, it is typically the signing of a sale contract that provides a comprehensive update regarding the pending sale and the projected outcome for investors.
The process of selling an asset held by a DST follows the same procedures as any other property sale. There are contracted timeframes for due diligence, closing, and requirements for deposits. Delays are common in real estate closings, and they tend to occur later than initially projected. The sponsor should keep investors informed throughout the process to prevent any surprises. The sponsor’s goal is to sell the property for the highest possible price, resulting in the greatest total return for investors.
Once the property is sold, the final disposition takes place. As the DST investment is fully passive, investors do not participate in the decision to sell or the closing process. Investors receive notification from the sponsor about the sale, and their portion of the equity proceeds is sent either to their designated qualified intermediary or directly to an account of their choice. The sponsor should provide investors with an estimate of their pro rata share of the equity proceeds and loan balance before the close, allowing investors to plan their next steps, such as a follow-on 1031 exchange. A closing statement is provided to investors after the sale, indicating the total sale price, closing costs, mortgage satisfaction, equity proceeds, and their pro rata share of equity and debt. As closing costs are typically deductible for a 1031 exchange, the important numbers for the exchanger are the equity proceeds, portion of debt satisfied, and the closing date, which triggers the timelines for identification and closing within 45 and 180 days, respectively.
Having a well-thought-out exit strategy is crucial when it comes to Delaware Statutory Trust (DST) investments. Let’s explore some common options for DST investors:
Cashing Out: This involves selling the underlying real estate assets held by the DST. However, it’s important to consider that this may trigger significant taxable events.
1031 Exchange: Investors can consider a subsequent 1031 exchange into another property of equal or greater value. By doing so, they can defer capital gains taxes and continue investing in real estate.
721 Exchange: If available, investors can opt for a 721 Exchange into a DST Sponsor’s UPREIT offering. This allows them to participate in a larger real estate portfolio while deferring taxes.
It’s important to note that DSTs are generally illiquid investments with limited secondary market opportunities. However, investors can still exit their investment by selling their beneficial interests to other accredited investors or through a secondary market platform. It’s crucial to carefully evaluate these strategies based on your specific financial goals and circumstances.