Stay Invested in Real Estate Without the Dreaded ‘Three Ts’

BY STEVE DINNEN

When selling appreciated investor real estate it’s best to defer income taxes if possible. This can be accomplished by way of a 1031 exchange, sometimes known as a Starker Exchange.

But a 1031 exchange mandates that you stay in real estate, as you are exchanging one property for another. And maybe you have tired of what some real estate servicers call the “three Ts of active management – tenants, toilets and trash.”

There is an easier way. It’s called a Delaware Statutory Trust. You’ll still be in real estate, but you’ll be on the passive side of the equation and – for a fee – be relieved from property management and asset management.

Delaware Statutory Trusts, or DSTs, own tens of thousands of properties across the country, from apartment complexes to medical office buildings to warehouses. They own strip malls and stand-alone retailers. The Internal Revenue Service approved them in 2004, as an enhancement of sorts to Tenant-in-Common ownership arrangements.

Both a DST and TIC bring together one or more investors to buy a property. A DST allows up to 499 investors (versus 35 for the TIC), so it can accumulate money for presumably bigger deals. And unlike TICs, DSTs put a manager in charge to make decisions on how to operate the investment.

DSTs have largely shoved aside TICs, which fell out of favor with lenders and were cluttered up with rules such as requiring investors to unanimously agree on major decisions. Bill Elson, a certified financial planner in West Des Moines with Spectrum Financial Services, and TIC-DST expert, says this shift to DSTs is partly driven by program sponsors who want complete control in determining their profits from acquiring, managing, and selling the properties.

“In some situations, this is good, but there could be conflicts of interest,” Elson says.

For instance, the manager is getting paid to manage a property, so is it in his best interest to sell it? Also, Elson says they might be paid to buy and sell properties. So the compensation of the manager needs to be fully understood and agreed to before investing.

Yet, a DST is the only format Elson has seen where diversified portfolios are being purchased, rather than buying just a single building in one location such as an apartment building, shopping center, office, or warehouse. Instead of investing in one building in one town with one tenant in a TIC, investors in DSTs can buy into 10-20 buildings from different national tenants in different geographic locations.