How a DST Ends: The Exit Conversation to Have Before You Invest

Delaware Statutory Trust offerings usually focus on the property, the tenant and the projected distributions. Those matter. But the moment that decides much of your eventual return is the end: when the property is sold, what happens to your money, and who decides.

Because DST investors have no control over the sale, understanding the exit before investing is the only chance to influence it.

How does a DST normally end?

In the typical case, the sponsor sells the property at the end of the hold period, which is often projected at five to ten years. The trust repays its loan, pays any disposition costs, and distributes the remaining proceeds to investors in proportion to their interests.

Each investor then decides individually what to do with their share: take cash and pay the deferred tax, or complete a new 1031 exchange into other real estate, including another DST.

Who decides when to sell?

The sponsor or trustee. Investors do not vote on the sale. A sponsor may sell earlier than projected if the market is strong, or hold longer if the market is weak or the loan terms allow.

That lack of control is inherent to the structure. It is what makes the DST passive and what keeps its interests eligible as 1031 replacement property.

What happens to your 1031 exchange at the end?

The sale of the DST's property is treated as a sale of your interest. You have a new relinquished property, and a new 45 day and 180 day clock starting from that sale if you want to exchange again.

Because you cannot control the timing, you may receive notice of a sale with limited warning. Investors who want to keep exchanging should keep a plan ready and ensure proceeds go to a Qualified Intermediary rather than being paid directly to them.

What is a 721 UPREIT exit?

Some DSTs are structured so that, instead of selling the property for cash, the property can be contributed to a real estate investment trust's operating partnership in exchange for partnership units. Investors receive units instead of cash.

In some programmes, the REIT or sponsor holds an option to acquire the property this way. That means the exit decision may effectively be made for you, and you may end up holding operating partnership units that cannot be exchanged under Section 1031 in the future.

Read the offering documents for any purchase option and ask whether you can decline the conversion.

What if the property struggles?

If the DST's property faces financial difficulty, the trust's restrictions can become a problem. A DST cannot raise new capital from investors, renegotiate its loan in many situations, or make major changes to leases. To deal with this, many DSTs include a provision allowing conversion into a limited liability company, sometimes called a springing LLC.

Converting gives the manager more flexibility to address problems, but investors then hold LLC interests, which are generally treated as partnership interests and are not exchangeable in the same way. It can also create complications for investors who want to continue deferral.

What questions should you ask before investing?

• ›What is the projected hold period, and what happens if the sale is delayed?
• ›When does the loan mature relative to the projected hold?
• ›Is there a 721 UPREIT option, and who controls it?
• ›Can investors decline a conversion to REIT units?
• ›What are the disposition fees at sale?
• ›What happens if the property needs capital or the loan must be restructured?
• ›How much notice will investors receive before a sale?

What should you do while invested?

Keep your contact details current with the sponsor, review annual reports, and maintain a relationship with a Qualified Intermediary. When a sale is announced, act quickly if you plan to exchange again.

How should you think about timing risk?

Because the sponsor controls the sale date, your exit may come in a year that suits the property's market rather than your personal situation. That affects taxes if you plan to take cash, and your ability to find a replacement if you plan to exchange again.

Some investors reduce timing risk by spreading proceeds across several DSTs with different sponsors, asset types and projected hold periods. When one sells, the others continue, and exits are staggered rather than arriving all at once.

What happens to distributions near the end?

Distributions may change as a sale approaches, as lease rollover, capital spending or loan maturity affect cash flow. Final distributions after a sale are usually the return of your share of net proceeds, which can be more or less than your original investment. Ask how sale proceeds will be distributed and whether any reserves are held back after closing.

What to do first

Before investing, read the sections of the offering documents covering disposition, conversion and purchase options. Ask the sponsor how previous offerings ended, how long they were held compared with projections, and how investors were informed.

Nothing here is tax, legal or investment advice. DST interests are securities offered to accredited investors only through licensed broker dealers and definitive offering documents, and investing involves risk including loss of principal. Confirm your understanding with your advisers before investing.