DST Fees: DST fees can be divided into upfront, operating, and disposition fees. For example, trusts will charge organization or acquisition fees to investors, like any real estate purchase transaction. It is important to review the fee structure, so you are aware of the total costs involved in the purchase.
Exiting DSTs
Standard Dispositions: It is important to review the DST’s exit strategy to understand the sponsor’s disposition strategy. The most common exit is that the DST sponsor sells the property on behalf of the trust, and any gains or losses are passed to the investor based on their pro rata share of the portfolio, and less any disposition fee charged by the sponsor. It is important to understand the disposition fee structure. Sponsors may take the fee regardless of the return to the investors and others are subordinate to the investor’s return.
LLC Conversion: If the property loses its underlying asset value due to poor circumstances, a DST can be converted into an LLC. Through this LLC, refinancing, raising capital, and finding new lease agreements are permitted. However, investors of the DST are no longer shielded from capital gains tax since the individual shares are now considered personal property.
REIT Conversion: Another exit strategy an investor might be offered is a 721 Exchange. If the DST is sold to a buyer with a sizable real estate portfolio, often a Real Estate Investment Trust (REIT), the REIT may offer to pay the investor in partnership units in lieu of cash. This 721 Exchange generally allows the investor to maintain their tax deferral as well as potentially benefit from diversification and value created from the REIT’s larger portfolio.
The Bottom Line
As with any investment, it is important to understand what you own and why you own it. Consulting with your accounting and tax professionals is a great way to understand the pros and cons of specific 1031 or DST investment options. In addition, reading the Private Placement Memorandum (PPM) will help you understand the investment structure, fees, exit strategy, and properties. Investors seeking to defer capital gains taxes from the sale of appreciated real estate and move to passive property management may find that the DST investment structure is a solid solution.
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Keystone National Properties (KNPRE) is a real estate and private equity firm whose team is passionate about delivering value, the strategic growth of the firm, and positively impacting the world. KNPRE’s founding philosophy is “Doing well by doing good.”
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