How does DST make money?

A Delaware Statutory Trust (DST) makes money primarily through two distinct yet complementary income streams derived from its real estate holdings: consistent rental income and potential capital gains from property sales.

Understanding Delaware Statutory Trusts (DSTs)

A Delaware Statutory Trust (DST) is a legal entity structured to allow multiple investors to co-own fractional interests in large commercial real estate assets. This structure is particularly popular for investors utilizing a 1031 exchange to defer capital gains taxes on the sale of a previous investment property. By investing in a DST, individuals can gain access to diversified, institutional-quality real estate properties without the complexities of direct property management.

Primary Income Streams for a DST

The financial performance of a DST is directly linked to the performance of the underlying properties it holds. These properties generate revenue through their operational activities and eventual disposition.

Rental Income

Rental income is the most reliable and often the primary source of ongoing revenue for a DST. This income is generated from the lease payments made by tenants occupying the properties owned by the trust.

• Diverse Property Portfolio: DSTs typically invest in a variety of income-producing real estate sectors, including:

  • Apartment Buildings: Revenue from residential tenants paying monthly rent.
  • Office Buildings: Income from businesses and corporations leasing commercial office spaces.
  • Shopping Centers and Retail Properties: Rent collected from various retail businesses and restaurants.
  • Industrial Facilities: Lease payments from warehouses, distribution centers, or manufacturing plants.
  • Medical Offices: Rent from healthcare providers and clinics.

• Operational Mechanism: Professional property managers oversee the daily operations of these assets, ensuring high occupancy rates, timely rent collection, and efficient property maintenance. After all operational expenses (such as property taxes, insurance, and management fees) are covered, the remaining net rental income is distributed to the DST. This income then flows through to the individual investors based on their proportional ownership interest in the trust.

Capital Gains

Capital gains represent the profit a DST realizes when it sells a property for a price higher than its original purchase price. While less frequent than rental income, capital gains can provide a substantial boost to the overall returns of a DST.

• Value Appreciation: Capital gains are generated through the appreciation of the property's value over time. This appreciation can result from various factors, including:

  • Market Growth: General increase in real estate values within a specific geographic area or sector.
  • Property Improvements: Enhancements or renovations that increase the property's desirability and rental potential.
  • Strategic Management: Effective asset management that optimizes tenant mix, lease terms, and operational efficiency.

• Strategic Property Disposition: DST sponsors continuously monitor market conditions and the performance of their assets. They may strategically decide to sell a property when it reaches its maximum value potential or when market conditions are particularly favorable for a profitable exit. The proceeds from such a sale, after accounting for any outstanding debt and selling expenses, constitute the capital gains. These gains are then distributed to the DST's investors, offering them a return on their initial investment and potentially facilitating another 1031 exchange.

Summary of DST Income Generation

By leveraging both steady rental income and the potential for capital appreciation through strategic sales, DSTs offer a comprehensive approach to generating income from real estate investments for their stakeholders.