Delaware Statutory Trust is an option for real estate investors looking to utilize a 1031 Exchange rather than pay capital gains and depreciation recapture taxes. .
Robert Zink is a commercial real estate broker with a securities license. The securities license allows him to offer Delaware Statutory Trust as an option. It can provide a solution to real estate investors wanting to sell out of their current property, but are not willing to surrender a significant portion of their gain through paying taxes. They would like to do a 1031 exchange, but not continue with the issues of owning real estate, tenants, toilets and termites.
A Delaware Statutory Trust provides the opportunity for investors to own a fractional interest in an institutional grade property; multifamily, office, medical, warehouse, etc. The tenants in these properties are high caliber, typically national companies with strong balance sheets and long term leases.
The investment in a Delaware Statutory Trust is passive. You have no involvement with the day to day operation, property management, or lender. The typical life expectancy of an investment is 6 to 8 years. At the end of the investment, the investor can either cash out, or 1031 Exchange into the next opportunity, while preserving their original 1031 Exchange.
The rate of return will vary from property to property, however the sponsor carefully selects properties in growing markets with less possible downside. Investing in growing markets with strong employment, and demand for the type of property invested in provide a lower risk and solid return. Cash flow expectation is between 5 - 6 average return on the investment . The investor receives a K1 for their taxes with the income and their percentage of the depreciation.
In order to execute your 1031 Exchange properly, you must designate a qualified intermediary. The duty of the QA is to hold the funds from your sale and then deliver to closing on your new property. You have 45 days from the sale of property #1 to identify its replacement, of which you can identify 3 potential options. In total from the date of sale, you have 180 days from the date of sale to close the purchase of the replacement property identified in the first 45 days.
A Delaware Statutory Trust property can be identified in part or whole for the proceeds from your sale. Many use this as a way to “balance” a trade. If you find a replacement property of lesser value than property #1, you can invest the balance of the sale proceeds into a separate property to balance the trade.
This is also an excellent tool for estate planning. If you have multiple beneficiaries you want to benefit upon your death, you can select multiple separate fractional investment. This assures each beneficiary will receive their designated property investment.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: As you get older and have less time to recover from exposure to a risk that actually comes to pass you need to minimize your risk. The value of real estate goes up and down, so I would say the BIGGEST RISK is investing in a "C" property in a bad market. Recently I saw a sponsor with a large apartment complex in one of the oil patch towns with a lot of fracking. I wouldn't invest nor encourage an investor to invest there because, what if fracking goes away? What if we decide we don't want to frack anymore? If that happens, the apartment house doesn't have a high value if fracking goes away. So buying that apartment house in Florida, California or Dallas proper would be completely different. I think avoiding properties in markets that have exposure to down markets. Additionally, I think investing with new sponsors that don't have a track record is risky.
So the BIGGEST RISK would be going into bad market or weaker markets or with a sponsor that doesn't have the ability or track record to solve the problem.