Delaware Statutory Trust Case Studies

Case Study #1 – A call came in from a local CPA explaining how they had a client that was going to close on a sale of a property in the near future and would have to pay substantial capital gains tax as well as depreciation recapture. The question was simple, was there any way other than a direct property to property 1031 exchange that could save the client taxes. The capital gains and depreciation recapture taxes would be substantial since the property had appreciated significantly and the client had taken every opportunity to fully depreciate.

The CPA further indicated that the client had another property in mind that might serve as a good 1031 opportunity but they weren’t sure if they would be able to close on the new property in time to meet the 1031 guidelines. In fact, they weren’t even sure if they would be able to close the deal at all. The CPA had heard that there was a way to hedge against the possibility of a substantial tax by identifying a qualifying DST at the time of settlement and up to 45 days after settlement. If there was a way to reduce this tax uncertainty, they wanted to present this to their client. The DST would serve as a backup property in case the replacement property deal fell through which of course would give their client an alternative tax savings strategy.

Case Study #2 – A call came in from a local estate planning attorney asking if there was a way to sell real estate and roll the proceeds into something other than another real property while still deferring taxes. The attorney represented an older couple that had built a substantial fortune in commercial real estate properties. The couple wanted to start liquidating the properties because they no longer wanted to deal with the issues associated with being a landlord and because they wanted to leave a simplified, securitized and unitized asset portfolio for their children and their other beneficiaries. The attorney had heard about DSTs, but wasn’t sure how they worked and what the benefit would be. He thought that perhaps it would be better to sell the real estate, pay the taxes and invest elsewhere as he had recommended in the past, but if DSTs were a better solution he would explore them with his client.

Once again, the impetus was that his client had reached a point in life where they no longer wanted the responsibility of dealing with the four T’s-Tenants, Trash, Toilets and Termites. They simply wanted a check to arrive on a monthly basis and secondly, they did not want their children to have to deal with real estate issues after their death since their children had no interest. The couple understood that real property would present real headaches to their children and might be a source of contention. They wanted to avoid potential disharmony and allow each of their beneficiaries to do what they wanted with their share of their inheritance. By selling the real property and investing instead in a DST, they would essentially transform a tangible, illiquid, “hands-on” real property into a passive, “unitized” security that would give them more flexibility for gifting and estate planning.

The sale of the property and the 1031 exchange into a DST was a solution they explored. They particularly liked the fact that it would be invested in institutional quality real estate under professional management and that it would receive the stepped-up cost basis upon their death just like the original properties would have received. This while paying no current taxes.

Case Study #3 – A call came in from a local developer that was having a hard time persuading a farmer to sell them a developable property because the farmer would have to pay substantial taxes and wanted the developer to pay for his tax liability in order to sell. The developer wanted to know if there was a way to persuade the farmer into selling so that everyone could win? Once again, the farmer would be able to roll the proceeds to a DST and defer paying the taxes until such time as they chose and if they chose to keep rolling one DST over into another they could essentially avoid taxes indefinitely. The farmer was able to convert farmland into income producing real estate and the developer was able to buy the land for a cheaper price than if taxes would have to be paid.

Case Study #4 – An urgent call comes in from a commercial real estate agent because one of his clients is closing in on the 45-day window and the replacement property deal doesn’t look like it is going to become a reality. Is there anything that can be done. The answer is yes. We identify two DSTs as replacement properties and see what happens. At the last hour as is often the case in these matters, the deal goes through but there is still a problem. If the deal had not worked out, 100% of the money could go into the DST solution and taxes would be avoided, but in this case, the replacement property was eventually purchased for less than the relinquished property. There was still a good chunk of taxes that would be due. Fortunately, the difference in price can be invested in a DST or series of DSTs in order to avoid current taxes. This particular commercial real estate agent has made it a habit to always include or identify a backup DST every time they look to do a 1031 exchange. It’s tax insurance and attracts more clients.

Case Study #5 – A call comes in from a business broker that specializes in succession planning. Her client is selling a business and isn’t sure if she wants to leave it to her son or sell it outright. A substantial portion of the value of the business is associated with appreciated real estate and the real estate is owned outside of the business. Her client insists on selling the real estate if the business ends up outside of the family because they do not want to assume tenant risk. Furthermore, her client recognizes that they can structure the transaction to their tax benefit if they have some flexibility in terms of the allocation of the sales price between the real estate and the remaining value of the business. The DST provides this flexibility if the sale goes through to the outside party.

Sera Capital Management – we are registered investment advisors and as such we do not accept commissions. Because DSTs are securities and only available to accredited investors, the selling agent must have a securities license. Our firm has developed a consulting practice in the DST arena and our fees are up front, transparent and we only get paid if the transaction successfully goes through. When the transaction closes, we waive 100% of the commission that would normally go to the selling agent. This means that our clients can save substantial fees and own a higher beneficial interest. As fiduciaries we have no incentive to steer our clients into a higher commission vehicle. Because we are transparent and only work with the top DST sponsors in the country, we believe our value proposition is attractive to our clients. They see everything up front and recognize we sit on the same side of the table with them.