Origin Investments’ Mike O’Shea breaks down the growing popularity of Delaware Statutory Trusts (DSTs) in 1031 exchanges. Discover how investors can move from active property management to passive ownership—and how Origin’s transparent fee structure and multifamily focus set it apart.
What Is a Delaware Statutory Trust (DST)?
In recent years, a very popular solution for a like-kind exchange has become a Delaware statutory trust, or DST. A DST is a wrapper that allows investors to pool their capital together to invest in institutional-quality real estate. Simply put, it allows investors to exchange up into a higher-quality institutional property and exchange out of the day-to-day management. There’s a full revenue ruling on this—2004-86—that says an interest in a DST will qualify as like kind for the purposes of an exchange.
How a DST Exchange Works
A good example would be a $100 million apartment building in Dallas, Texas. And let’s just say, for example, you’re selling a rental home in Chicago for a million dollars. You would sell that property through the normal process and roll the proceeds directly to a qualified intermediary. You’d have 45 days to identify a replacement property. You would simply identify the DST, and then the qualified intermediary would fund those proceeds with the Delaware Statutory Trust. Now, instead of owning a million-dollar property in Chicago, you own 1% of this $100 million apartment building in Dallas, Texas.
Key Benefits for Investors
This structure alleviates a few problems for you. Number one, you’ve paid no taxes on the sale—it’s a 100% tax deferral if done correctly. And number two, you’ve moved from an active manager of real estate into a passive investor. There are also a lot of rules that you have to follow, including the 45-day identification window and 180 days to complete the exchange. You have to match debt and match equity, and it’s very difficult to do a 1031 exchange on your own. You could think of a DST as a turnkey solution where you can roll the proceeds very simply and quickly into a passive investment.
Understanding DST Fees
The DST market is rife with fees. And not only are these fees high, they’re also hidden. Unless you read through the 200-page PPM, you may be unaware of some of these fees that are charged. The fees on the front-end load can be as high as 10 to 15%. There could be a managing broker-dealer fee, sales commissions, organizational and offering expenses, disposition fees, finance coordination fees—and they all add up over time.
At Origin, we wanted to be very clear about our upfront fees and offer a better investment to our investors. Right on the front page, we show our acquisition fee and a reimbursement for organizational and offering expenses. It puts our front-end load in the 2 to 3% range, where the market rate for DSTs is anywhere from 10 to 15%. We think that’s going to lead to better investor outcomes.
Why Origin Focuses on Multifamily Real Estate
At Origin, we focus 100% on Class A multifamily in high-growth markets. That means we don’t invest in shopping centers, office buildings, or distribution centers. Multifamily has shown the highest risk-adjusted return of any commercial real estate asset going back the last two decades. It’s consumption-based—multifamily is a need, not a want—and we are severely underhoused in this country. We’re very bullish, for many reasons, on the future of multifamily at Origin.
Considering an exchange? Learn more about our low-fee Origin Exchange program.
