Full Service or Do-it-Yourself. What is the best way to own Commercial Real Estate?

Like so many scenarios in life, results can be better if you do it yourself or sometimes better handled by an expert. The same can be said about Commercial Real Estate investing – especially as it pertains to 1031 Exchanges. Some investors prefer to acquire, own, and manage individual properties; while others prefer to have another entity handle the various components of real estate ownership.

This blog discusses the benefits of passive ownership and management of the Delaware Statutory Trust.

Passive - Not Active Management

The Delaware Statutory Trust (“DST”) is …a Trust. As with any Trust, the Trustee is required to act in the best interest of the beneficiaries of the trust. The DST structure is Passive. It is a Special Purpose Entity, not an Active Business Ownership Structure.

This benefits the investor by avoiding the following issues that property owners typically encounter when the property is encumbered with a loan:

Potential Issues on Loans:

• Personal Guarantees
• Public record of loan
• Pre-payment penalties
• Floating-Rate debt in an increasing interest rate environment
• Closing Costs
• Liens on the property
• Covenants on the Loan
• Loan Origination Fees
• Debt on their credit report

Potential Issues with Property Management:

• Property taxes
• Property insurance (including Flood, Hurricane insurance, etc.)
• Utilities
• Common Area Maintenance Requirements
• Capital Improvements
• Tenant Improvements
• Property Management Fees
• Supply costs
• Capital Expenditure Reserve Accounts (other than escrow)
• Appraisals
• Applicant screening
• Notice requirements
• Lease negotiations
• Potential litigation from tenants
• Phase I or Phase II Environmental Assessment Reports
• Late-night emergencies (particularly with apartment ownership)
• Engineering Report
• Property maintenance
• Evictions
• Attorney fees

The Trust, The Trustee and The Beneficiary: How This DST Structure May Benefit an Investor and Business Owner

The Trust is the legal entity that the proceeds from your property exchange into. It is a special purpose entity under Delaware law holding title to one or more income producing real estate assets.

The Trustee of the Trust is the sponsor company managing the trust and acting as fiduciary on behalf of the Trusts beneficiaries.

The Beneficiary of the Trust are investors of the trust who receive a pro-rata share of the income and proceeds from the Trust.

By exchanging into a DST as your replacement property, administrative duties and paperwork are minimal as the Trust and Trustee manage and monitor every aspect of acquiring, owning, managing, negotiating, and disposing of the trust and its real estate assets.

In addition, the Trust structure of the DST contains no voting requirements, no capital calls, limited liability, and creditor protection. For some investors, this potentially may make their financial lives a little bit easier.

If you are tired of navigating the issues of owning and managing real estate, let’s have a conversation.