Review: Modern Real Estate Investing: The Delaware Statutory Trust
Authors: John Harvey, Trawnegan Gall and David Kangas
There are tons of books concerning real estate investments. Some are quite good, others are of questionable quality, and some just give the reader abominable advice. One that falls into the category of being more than quite good is Modern Real Estate Investing: The Delaware Statutory Trust that was put together by John Harvey, owner and general securities principal of Cornerstone Real Estate Investment Services, with his colleagues Trawnegan Gall and David Kangas, both of whom are licensed securities representatives of the same company.
As pointed out in the Acknowledgements, the objective of the book is to introduce the Delaware Statutory Trust (DST) concept for real estate. In truth, I never heard of this entity before I read this handbook, which is probably due to my living in Canada which unfortunately does not have a similar real-estate investment vehicle. As my curiosity got the better of me, particularly that I used to practice real estate law, I decided to dive into this excellent primer and find out what my friends south of the border were up to in the way of unique real estate investment opportunities.
What is a DST? As the manual informed me, it is a trust that provides the benefits of owning a fractionalized real estate investment while at the same time eliminating management activities that would be associated with individual real estate ownership. It offers an investor the opportunity to own an investment-grade property or properties together with other accredited investors via a securities private placement offering. Investors may be able to participate with minimum investments as low as $25,000 ($100,000 for exchanges), that would give them access to a portion of a larger commercial institutional grade real estate with values up to $100 million.
There are many other benefits the DST offers such as safeguards that are put in place including full disclosure offering materials, professional due diligence, limited liability protection, more favorable financing terms, lower transaction and administrative costs. And here is the really great part, the purchase and sale of a DST interest may qualify for capital gain non-recognition under section 1031 of the Internal Revenue Code, which is one of the most powerful wealth building tools available to the US taxpayer.
If you can defer capital gains, you create an exponential power for wealth creation. By virtue of this provision of the law, real estate investors and property owners are allowed to exchange one business or investment property for another without immediately incurring taxes. This transaction, often referred to as a “1031 exchange” or “like-kind” exchange, allows an investor to reinvest the full amount of net sale proceeds into new investments while deferring capital gain taxes until the investor eventually cashes out. It should be pointed out that in order to receive such tax-deferred treatment, DST investors must be aware of several important restrictions and limitations which are fully explored in the book.
While the DST structure may have several rewards, there are nonetheless certain limitations and risks that are fully explained in detail in the book. Briefly, these include the following: once the DST offering is closed, no additional capital contributions are permitted; it cannot renegotiate terms of existing loans nor borrow new funds; it is not permitted to reinvest the proceeds from the sale of a property and thus the proceeds must be distributed to the beneficiaries; capital expenditures are limited to normal repairs and maintenance and non-structural improvements as well as those required by law; if there is cash held between distributions, they may only be invested in short-term debt; all cash, other than reserves, must be distributed on a current basis; the trustee cannot enter into new leases or renegotiate current leases. Before investing in DSTs one would be wise to seek professional advice concerning the various trade offs.
There is a great deal more contained in the manual that the authors break down into four sections of twenty-four chapters and two appendices. Using a step-by-step approach coupled with simple language devoid of technical jargon, the authors include an introduction to the DST, the offering, analyzing the offering and a chapter dealing with other vehicles of investments such as private REITS and real estate and other funds. Each chapter is sub-divided into sub-topics covering the structure of the DST, requirements of an accredited investor, rules of thumb concerning 1031 exchanges, choosing a broker, sponsor, and property, the closing process, the holding period and what to expect, the final disposition and many other pertinent matters concerning DSTs. And as mentioned in the introduction, the authors have attempted to balance advantages with disadvantages and opportunities with associated risks and thus have devoted an entire chapter to potential risks.
Without doubt, the book's eye-opening balanced approach to exploring DSTs investing should find a welcome home on the bookshelves of laypersons, accountants, lawyers, real estate investors, tax advisors, US tax-payers with rental property, farm property, or any property used in trade or business or for investment purposes and others who may be interested in finding out about new doors of investment opportunities. In addition, the authors move quickly and cover an expanse of ground with the objective of producing a publication that is far more than publicity for their firm and its services. Consequently, as they state in the Foreword, they have asked several of their trusted colleagues from various real estate sponsors, attorneys, and qualified intermediaries to further enrich the book through their contributions in various forms.