DSTs: Your Guide to 1031 Exchange Investments - Lifecycle of a DST Episode 1

Hello and welcome to Exchange Insights, your resource for 1031 intelligence and education. This is the first video in our three-part series called the life cycle of a DST. My name is Tom Wall. I'm a 1031 expert and partner here at Anchor1031. Today we're going to be going over what you should expect to know before you engage in a 1031.

So to start us off, we'll talk about how a DST comes to market. A DST begins life with a sponsor. Now, a sponsor is a real estate investment firm that identifies a property that they want to offer to 1031 exchange buyers. So they go they go out, they buy that property, they stabilize it, and they put it inside of a Delaware statutory trust. From there, it's the sponsor's job to execute the business plan, to manage the property, communicate with investors. They send out tax reports and provide periodic property updates. But most importantly, their job is to ensure that the asset and the trust are properly managed.

So, the way these DSTs and these investments come to market is first that sponsor identifies a property that they want to manage as a DST. They want to offer it to 1031 buyers. They go out, they buy the property, they have to put their own money up to close on it, and then they create this trust structure, this Delaware statutory trust, and they put the trust on title. So, at first, the sponsor owns 100% of that trust. The rent's going to flow up from the property through the trust and into the bank account of the sponsor. So, if you're following, the sponsor is already closed on the property. They own 100% of the trust, and their goal is to manage that asset. They're not typically equity investors. So, their goal is to sell off shares of that trust to DST or to 1031 exchange buyers.

Investors are able to buy their share of the DST one by one. In other words, DST investor number one can close today. They can buy their interest in the DST right as soon as their cash is ready to go from their exchange and they start earning revenue right away. They do not have to wait for any of the subsequent investors in that deal. Aside from ease of closing, investors don't need to worry about negotiating with the seller. They don't need to navigate their way through escrow, and they don't need to overcome any of these potential hurdles or pitfalls that we see take place when individuals go to transact and buy real estate on their own.

DSTs make a lot of sense for 1031 buyers because they've already been bought and stabilized, deals closed, the due diligence has already been completed. They're sitting on the shelf ready for 1031 buyers to purchase. And so it's easy for 1031 buyers to line up their timing and eliminate that risk of not being able to identify their property and close on the investment within your 1031 timelines of your 45-day window to identify and your 180 days to close.

So once the sponsor has the property stabilized and the property's in the trust, it's considered syndicated. This means that the trust holds title of the property and the DSC sponsor can now go out and sell interest of that trust to investors and bring in 1031 buyers. So the DSC sponsor is an asset manager. They do not typically have relationships directly with potential investors. So they rely on brokers and advisers to find investors.

In order to bring the DST to market and start raising capital from retail investors, sponsors will collect their due diligence and third-party reports. They package them up and share them with distributors. A distributor is typically a broker dealer that receives wires of exchange funds from investors who can participate in the deals that the sponsor offers. That broker dealer is going to put those offerings up on their shelf of approved products. They do all their own homework and diligence to say, "Yes, we believe this is a good deal and we want to offer it to our representatives."

So in the DST distribution channel, you have sponsors that offer products, you have broker dealers that approve the products, and then you have representatives that introduce deals to investors. There's no such thing as a DST store. It would be really nice if there was, but DSTs are private placements that come with certain legal requirements. And the biggest of them all is you need to be an accredited investor to participate. What this means is an investor needs to meet specific income or net worth requirements to participate in DST offerings. So, this limits how these deals can be offered. Sponsors can't advertise DSTs just to anybody online. And investors can't just go out and sign up for these deals on their own.

From the DST distributor's perspective, the broker dealer, they need to have the investor's information, personal financial statement, a signed subscription agreement, and a wire from that investor before they can actually complete a transaction. So, really, the only way an investor can participate in a DST is with an introduction from a registered representative. The registered representative, sometimes known as a broker, works with the broker dealer to submit all required documents. Those representatives' main role is to educate investors and provide suitable deal recommendations. So this is why it's very important for investors to work with a trusted representative or advisor in order to participate in DST deals.

So once a broker has a client that would like to make an investment, they will submit what's called a subscription agreement on behalf of the investor. The subscription agreement has all of the data that's required for the investor to participate in the deal. It gets submitted, gets cleared by the broker dealer, and a wire is requested. Once the funds are wired from the investor's exchange account over to the broker dealer, the broker dealer's going to issue a wire to the sponsor to complete the transaction. The investor has now subscribed to the DST deal. They should receive a welcome letter, welcome packet, information about the property they invested in, and expect to be hearing from the sponsor on a periodic basis via quarterly updates and, of course, annual tax filings.

As you can see, the DST capital raising process is quite different than your typical syndication. So that's one thing to know going in. Investors should know that there are a lot of moving pieces to close on a DST investment. But the good news is with a good advisor like Anchor1031, we can do all the hard work for you.

In summary, DST sponsors syndicate deals. Broker dealers vet those deals. Advisors recommend suitable investments. And all work together to help investors close on their 1031 exchange. So that's the DST lifecycle from the sponsor buying the property to investors participating in the offering. Keep an eye out for episodes 2 and 3 where we talk about what investors should do while they wait for their DST to sell and ultimately what to expect when your DST does sell.

Anchor1031 helps landlords and investors transition into passive ownership through both 1031 exchanges and diversified opportunities aimed at generating passive income and deferring capital gains taxes. Thanks for watching. If you'd like to learn more about 1031 exchanges or DSTs, please visit our website at anchor1031.com.