BREAKWATER RESOURCES

Delaware Statuary Trusts

DSTs

Delaware Statutory Trusts

The Ideal 1031 Replacement Property Alternative

While many Exchangers are content to use their local real estate professional to find a property in their own area, others desire a more diversified selection of property types and geographic locations. Some also desire to transition from an active ownership and management role into a more passive one. If that is the case, Breakwater Capital can help you build a diversified portfolio of several different types of like-kind investment properties (multi-family, healthcare, retail, industrial, etc.). 

The 45-day identification period moves very quickly and often creates needless stress. Our experienced team of securities and real estate professionals monitors the DST market daily. This means that at any time you have access to a fully-vetted, turnkey 1031 exchange solution where the loan, tenants and cash flow are already in place for a seamless 1031. And our streamlined process makes for both a simple and straightforward process.

DST OWNERSHIP EXAMPLE

When you invest l031 money into a DST, you take on partial ownership of the equity and debt. These sample clients’ investments provide tangible examples of what your DST could  potentially look like. 

investor spotlight

Smith Family

Sold Beach House.
Exchanged Into DST (10% Owner)

Equity

$800,000

Debt

$1,200,000

Debt

$1,200,000

Main St. Apartments, DST

$20,000,000 Equity Offered / 7.0% Cash Flow / 60% LTV

investor spotlight

David Williams

Sold Industrial Building.
Exchanged Into DST (5% Owner)

Equity

$1,200,000

Debt

$1,800,000

Debt

$3,000,000

DST 101

What is a Delaware Statutory Trust?
A Delaware Statutory Trust, or DST, is a legally recognized real estate investment trust in which investors can purchase ownership interest. Investors who own fractional ownership are known as beneficiaries of the trust. DSTs, unlike many other co-ownership real estate investment structures, are 1031-eligible. For many exchangers, DSTs are a better option than a traditional “whole property” exchange, where the investor sources and acquires 100% of a property (a “whole property”) and actively manages that property.
Timing Consideration of a 1031 Exchange
Timing is one of the most challenging aspects of a 1031 exchange. The taxpayer has only 45 days from the sale of their relinquished property to identify potential replacement properties, and up to 180 days to close the acquisition of one or more replacement properties. In addition to the time constraints, other factors can make exchanges very difficult to accomplish, including:

• complexity of the tax rules
• limited supply of replacement properties
• debt requirements
DSTs Solve These Challenges
DSTs are structured to satisfy the like-kind requirement and provide the same tax benefits as direct ownership of real estate. Combined with impressive returns generated by skillful and experienced sponsors, the simplified investment process makes DSTs a superior option for many exchangers.

These properties have already been acquired by the DST; if the DST is leveraged, the loan is in place with no personal liability to the investors; and all due diligence has been completed, with investors given electronic access to documents and reports (title, survey, appraisal, environmental report, property condition report, roof report, etc.).
Benefitting Your Heirs
You can continue to defer capital gains taxes using the 1031 exchange process until you pass assets onto your heirs. DST shares can be evenly divided and passed on to multiple heirs, greatly simplifying investors’ estate planning.When real property is passed to your heirs, whether held directly or through a DST, the basis by which the capital gains are determined steps up to the current market value at the time of inheritance. After your heirs inherit the property, they may sell it for its current value and bypass any capital gains you amassed within your lifetime.
Delaware Statutory Trust Investment Sponsors​
You can continue to defer capital gains taxes using the 1031 exchange process until you pass assets onto your heirs. DST shares can be evenly divided and passed on to multiple heirs, greatly simplifying investors’ estate planning.When real property is passed to your heirs, whether held directly or through a DST, the basis by which the capital gains are determined steps up to the current market value at the time of inheritance. After your heirs inherit the property, they may sell it for its current value and bypass any capital gains you amassed within your lifetime.
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Delaware Statutory trust Investment Sponsors

Inherent DST Qualities

DSTs were created specifically for those seeking to perform a 1031 exchange, but also in mind for investors preferring to place their funds into an asset with the potential for stable, income producing properties.

These investments were designed for the tax sensitive investor seeking income, capital preservation and a more conservative approach (with appreciation secondary).

Low Leverage

Most DSTs employ an LTV between 0% to 60%

Fully Stabilized

The property must meet certain occupancy thresholds before it comes out to investors.

Less Speculative Investment Strategy

Sponsors cannot employ high-speculation tactics like ground-up developments or deep value-adds

Newer Properties

Since DSTs cannot deploy significant capital expenditures to create value, most properties are either new/recent builds or have been rehabbed in the recent past.

No Cash Calls/Reserve Accounts

DSTs cannot ask investors for more money at any point in time. Therefore, each DST begins with ample reserves to account for any unforeseen circumstances or shortfalls in operating income.

Pros and Cons

No Management Responsibilities

The DST is the single owner and agile decision maker on behalf of investors.

INSTITUTIONAL QUALITY PROPERTY

DSTs allow investors to acquire partial ownership in properties that otherwise would be out-of-reach. 

LIMITED PERSONAL LIABILITY

Loans are nonrecourse to the investor. The DST is the sole borrower. 

Diversification

Investors can divide their investment among multiple DSTs, which may provide for a more diversified real estate portfolio across geography and property types. 

SWAP TIL YOU DROP

The DST structure allows the investor to continue to exchange real properties over and over again until th investor’s death. 

POTENTIAL FOR QUICK CLOSE

Can close in as little as 3-5 business days with no interaction with a bank and possibly continue your cash flow uninterrupted as soon as the following month. 

CERTAINTY OF MEETING 1031 DEADLINES

As long as there is available equity, exchangers can make reservations in a given DST until their sale closes. Should they change their mind or if their sale doesn’t close, the investor is not obligated to the sponsor, nor will they be charged any penalties.

AGGRESIVE INVESTORS

Not for those seeking outsized returns in a short amount of time or are pursuing aggressive growth strategies (developing or deep value adds). 

Lack of Control

Not for investors who need 100% control.

illiquid

Interests of a DST should be considered illiquid just like any other real estate, especially if you invest via a 1031 exchange.

DST Diversification

Attempting to reduce risk in real estate real estate investments is possible by practicing diversifica­tion. Instead of investing in a single property with concentration risk, prudence dictates investing in a number of properties with different investment and risk parameters.

By investing in different asset classes, different loca­tions and properties leased by different tenants, you may be able to mitigate certain risks associated with investing in a concentrated invest­ment. By diversifying your holding periods, all of your investments will not mature and have to be sold at the same time. If you invest in Delaware Statutory Trusts, it also is practical to diversify by sponsorship so that your assets are not all managed by the same real estate firm.

TYPES OF DST’S

Multi-Family DST

Self-Storage

Senior Housing

Healthcare

Industrial

Corporate-Leased Triple Net

Breakwater Can Handle the Debt for You

The DST seeks to secure non-recourse financing at favorable terms

The DST sponsor leverages their strong lender relationships to attempt to obtain financing terms investors would most likely not be able to obtain on their own.

The DST assigns the pro-rata share of debt to the investor

The DST Assigns The Benefits Of The Debt But Retains The Obligations. The Debt Is Non–Recourse To The Investor. The Investor Does Not Need To Qualify For The Debt Personally.

Investors can relax and know the debt is handled!

Investors fulfill their debt requirements without the headache associated with qualifying for and being liable for the debt obligations.

Putting it all Together

A Hypothetical Client Allocation

One of the single greatest advantages of utilizing DSTs in a 1031 exchange is the power to diversify your investment. In the example below, we took an investor exchanging their single-family rental into multiple DSTs. They are still taking on similar real estate risk, but are now more diversified in several aspects: Number of properties & tenants, multiple geographic locations and a balanced mix of asset classes and managers.

Hypothetical Case Study

CLIENT BACKGROUND, GOALS & CHALLENGES

John & Cindy, a married couple in their 60’s, owned several rental properties in Southern California that had done quite well. Even though they were making a good income, one property in particular was aging and needed some work in order to attract the quality tenant that John & Cindy were accustomed to. Now a decision had to be made; either spend a considerable amount to make the improvements, or sell the property and pay massive capital gains taxes. John was aware of the concept of a 1031 exchange, but the complexities and timing issues were preventing him from taking full advantage of it.

SOLUTIONS & PLAN IMPROVEMENT

By utilizing a 1031 exchange we were able to reinvest the proceeds from the sale of their property into three different DSTs. Each of these properties were institutional quality assets utilizing different strategies located in multiple states.  Furthermore, their was no 1031 exchange risk or an interruption in rental income for John & Cindy.

RESULTS / OUTCOMES

John & Cindy were very satisfied with the fact that they were now much more diversified investors and not having to rely on just a handful on tenants.  In addition, their after-tax net income from the property increased from approximately $45,000 annually to over $60,000 annually. John & Cindy also loved that they no longer had to manage the day to day issues that came with the property and had more time to enjoy their retirement together.

The hypothetical scenarios provided herein are meant only to demonstrate mathematical principals. There can be no guarantee of performance or that any investment will achieve its stated objectives.

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