The Delaware Statutory Trust (DST) structure, traditionally focused on specific property types like single-tenant, triple-net leases, is now evolving to include multi-tenant properties under long-term master leases. This expansion highlights the growing versatility of DSTs in the real estate market, making them a compelling option for a wider range of investors.
Operational Flexibility in Property Management
In a master lease, a master tenant (usually the sponsor or affiliate of) will lease the property from the trust, and pay rent (master lease payment) to the trust. The master tenant, then sublets the property to the tenants, and in effect can legally circumvent the operational restrictions mentioned above (deadly sin #7).
Align Interests & Maximize Property Income
The master lease structure also aligns the interests of all parties and maximizes property income. The master tenant, essentially the sponsor, pays a predetermined rent to the trust, covering the debt plus a specified return. Any property-level net income above the debt service and master lease payment is retained by the master tenant. This setup incentivizes the master tenant to maximize rents and avoid income shortfalls, ensuring that both the trust and the master tenant benefit from the property’s performance.
Avoid Unanticipated Expenditures
One of the significant advantages of the DST structure is the mitigation of unanticipated expenditures. Since there is little to no ability to negotiate changes in the master lease terms and rent payments with the DST trustee, the sponsor typically sets aside more capital upfront for unforeseen repairs and expenses. These reserves are in addition to the standard lender-required reserves, providing an additional layer of financial security for the investment.
By understanding these aspects of the DST structure, investors can better assess whether DSTs are the right fit for their real estate investment strategies. The adaptability, operational flexibility, aligned interests, and financial safeguards offered by DSTs make them a robust option worth considering in the evolving real estate market.