If you’re in the world of real estate investing, you’ve likely heard of the Delaware Statutory Trust Act (DSTA). But do you really understand what it is and how it works? This comprehensive guide aims to demystify the DSTA, providing you with a comprehensive understanding of this unique legal structure. Delaware Statutory Trusts (DSTs) are an increasingly popular way to invest in real estate, particularly for those looking for a passive investment option.

However, DSTs can be complex and confusing, with many nuances and intricacies that can be difficult to navigate. In this guide, we’ll break down all the key elements of the DSTA, including what it is, how it works, and the benefits and drawbacks of investing in DSTs. By the end of this guide, you’ll have a solid understanding of this important legal framework and be better equipped to make informed investment decisions. So, let’s dive in and explore everything you need to know about the Delaware Statutory Trust Act!

The Delaware Statutory Trust Act (DSTA) is a legal framework that provides investors with an efficient and flexible method of owning and managing real estate assets. The DSTA was enacted by the Delaware legislature in 1988. And has since become a popular vehicle for real estate investment. The DSTA is designed to be a flexible and efficient vehicle for investors who wish to pool their capital and invest in real estate.

What is a Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is a legal entity that is created under the DSTA. A DST is similar to a traditional trust in that it is a fiduciary relationship. In which one party, the trustee, holds and manages assets for the benefit of another party, the beneficiary. However, unlike a traditional trust, a DST is a separate legal entity that can own and manage the property. A DST can be used to hold and manage many different types of assets, including real estate, personal property, and intangible assets.

History and Evolution of the Delaware Statutory Trust Act

The DSTA was enacted by the Delaware legislature in 1988 to provide a legal framework for investors to own and manage real estate assets. The DSTA was modeled after the Delaware Business Trust Act, which was enacted in 1988 to provide a legal framework for business trusts. It has since been amended several times to provide additional flexibility and to address issues that have arisen in the use of DSTs.

Benefits of using a Delaware Statutory Trust

One of the primary benefits of using a DST is the flexibility it provides to investors. DSTs can be used to hold and manage many different types of assets, including real estate, personal property, and intangible assets. DSTs can also be used to pool capital from multiple investors, which can provide access to larger and more diverse investment opportunities.

Another benefit of using a DST is the limited liability protection it provides to investors. Because a DST is a separate legal entity, investors are generally not personally liable for the debts and obligations of the DST. This can provide investors with additional protection and reduce their risk exposure.

How to set up a Delaware Statutory Trust

Setting up a DST requires the assistance of a qualified attorney who is familiar with the DSTA. The attorney will work with the investors to draft the trust agreement, which will define the rights and obligations of the trustee and the beneficiaries. The trust agreement will also specify the terms of the investment, including the expected returns and the duration of the investment.

Once the trust agreement has been drafted, the trustee will file a certificate of trust with the Delaware Secretary of State. The certificate of trust will provide information about the DST, including the name of the trust, the name and address of the trustee, and the purpose of the trust.

Compliance requirements under the Delaware Statutory Trust Act

DSTs are subject to several compliance requirements under the DSTA. For example, DSTs must maintain accurate and complete records of their transactions and activities. DSTs must also file annual reports with the Delaware Secretary of State and must maintain a registered agent in Delaware.

DSTs must also comply with federal securities laws, which require the DST to register with the Securities and Exchange Commission (SEC) if the DST is offering securities to the public. The DST must also comply with state securities laws. Which may require the DST to file a notice or registration statement with the state before offering securities to investors.

Tax implications of using a Delaware Statutory Trust

DSTs are generally treated as pass-through entities for tax purposes. This means that the income and losses of the DST are passed through to the investors, who are responsible for paying taxes on their share of the income. Or deducting their share of the losses on their tax returns.

DSTs are also eligible for certain tax benefits, such as the ability to use depreciation to offset income. However, investors should consult with a qualified tax professional to understand the specific tax implications of investing in a DST.

Case Studies of Successful Delaware Statutory Trusts

One example of a successful DST is the DST that was used to acquire the Sears Tower in Chicago in 2004. The DST was structured to allow investors to pool their capital and acquire the property. Which was valued at $840 million at the time of the acquisition. The DST was able to generate significant returns for investors, and the property was sold in 2015 for $1.3 billion.

Another example of a successful DST is that was used to acquire a portfolio of medical office buildings in 2019. The DST was structured to allow investors to pool their capital and acquire the portfolio. Which was valued at $120 million at the time of the acquisition. The DST was able to generate significant returns for investors, and the portfolio was sold in 2021 for $175 million.

Comparison of Delaware Statutory Trusts to other types of Trusts

DSTs are similar to other types of trusts, such as real estate investment trusts (REITs) and limited liability companies (LLCs). However, there are some key differences between DSTs and these other types of trusts.

One difference between DSTs and REITs is that DSTs aren’t required to distribute a minimum amount of income to investors. REITs are required to distribute at least 90% of their taxable income to investors each year. Which can limit their flexibility. DSTs, on the other hand, have more flexibility in terms of how they distribute income to investors.

Another difference between DSTs and LLCs is that DSTs are generally more passive investments. Investors in a DST typically don’t have any control over the management of the assets held by the DST. Whereas investors in an LLC may have more control over the management of the assets held by the LLC.

Frequently asked questions about the Delaware Statutory Trust Act

  1. What types of assets can be held in a DST? A DST can hold many different types of assets, including real estate, personal property, and intangible assets.
  2. Can a DST have multiple trustees? Yes, a DST can have multiple trustees.
  3. Does a DST have to be registered in Delaware? Yes. A DST must be registered in Delaware in order to take advantage of the legal framework provided by the DSTA.
  4. What is the minimum and maximum number of investors that can participate in a DST? There is no minimum or maximum number of investors that can participate in a DST.

Conclusion

The Delaware Statutory Trust Act provides investors with a flexible and efficient method of owning and managing real estate assets. DSTs can be used to pool capital from multiple investors and can hold many different types of assets. DSTs are subject to compliance requirements under the DSTA and federal and state securities laws. These are generally treated as pass-through entities for tax purposes and can provide investors with limited liability protection. Investors should consult with a qualified attorney and tax professional before investing in a DST.

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