Understanding Delaware Statutory Trusts (DSTs): Key Roles and Investment Considerations

A Delaware Statutory Trust (DST) is a unique, passive investment vehicle that provides investors with fractional ownership in real estate. Through this structure, investors gain exposure to commercial properties, enjoy potential diversification, and, in some cases, may benefit from cash flow. However, it’s crucial to understand the roles of the trustee and beneficiary, as well as the legal and operational framework governing DSTs.

The Role of the DST Trustee

The DST trustee holds ultimate responsibility for overseeing the trust. Trustees play a pivotal role in ensuring the trust is set up and managed in compliance with relevant regulations. Importantly, they appoint the DST sponsor (or sponsors), who manage day-to-day operations and asset acquisition. The sponsor is the key player in sourcing and securing real estate assets for the trust and issuing beneficial interests to investors.

An essential requirement for a DST trustee is that they must be based in Delaware, although they can designate a managing or signatory trustee outside the state. Trustees must adhere to a specific set of rules that include:

• Income restrictions: Generated income cannot be used for property acquisitions or significant improvements, except for essential repairs.

• Investor limitations: No new investors can join once the trust has closed.

• Lease and loan limitations: Trustees cannot renegotiate loans or leases to try and improve terms.

In addition, trustees must uphold fiduciary duties, ensuring decisions are made in the best interests of the trust and its beneficiaries. These duties include:

• Duty of Care: Making well-informed, reasonable decisions based on current available information.

• Duty of Loyalty: Acting in good faith to protect the interests of the trust and its investors.

The DST Beneficiary: Who Can Invest?

The term beneficiary refers to the investor in the trust. While beneficiaries have no direct role in the operational decisions of the DST, they must meet certain criteria to participate in the investment.

To be eligible, investors must be classified as accredited investors, which typically means they must:

• Have a personal income of at least $200,000 annually ($300,000 for couples), 

• Have a net worth of $1 million (excluding their primary residence), or

• Hold professional investment credentials or be knowledgeable employees of a private investment fund.

DST beneficiaries must understand that their investment is largely hands-off. They have no influence over decisions made by the sponsor, and since DSTs tend to be long-term commitments, capital may be tied up for several years.

Key Considerations Before Investing in a DST

While DSTs can provide diversification and potential passive income, they also come with unique considerations. Potential investors must understand the structure of these trusts, including the roles and responsibilities of trustees and beneficiaries. Additionally, it’s important to realize that DSTs are long-term investments. As such, investors should carefully evaluate their own financial goals and consult with their personal advisory team to understand the risks and rewards of participating in a DST.

As with any investment vehicle, thorough due diligence is essential before committing capital to a DST. Investors should carefully review the offering memorandum and consider working with financial advisors who specialize in alternative investments to understand the risks and rewards of participating in a DST.