In September, Blackstone announced that its first Delaware Statutory Trust (DST) offering was fully subscribed.
The raise: $175.6 million. The assets: two Sunbelt apartment communities totaling 612 units. Both properties came out of BREIT’s portfolio (Blackstone’s $120 billion-plus non-traded REIT platform).
BREIT-affiliated entities previously owned the buildings. A Blackstone affiliate now leases them from the DST, BREIT's operating partnership guarantees the rent, and the REIT's operating partnership may eventually acquire the properties through a tax-deferred transaction.
Blackstone is on quite a few sides of this deal. Sorta like this:
That doesn't necessarily make it a bad investment, of course. In fact, for the right investor, a DST can solve a very real problem: how to sell an appreciated rental property without immediately paying capital gains taxes or spending the next decade dealing with tenants.
You are all big boys and girls and know there is no free lunch. Investors give up control, accept substantial illiquidity, and potentially pay several layers of fees.
And when the sponsor supplies the property, structures the investment, collects the fees, and potentially determines the exit, it's your job, dear investor, to understand exactly what you are buying (if you need a refresher, start here).
Let's look under the hood.
This article is for educational purposes only and isn’t tax, legal or investment advice. Talk to your own tax advisor before making any 1031, DST or 721 decision.
First, why would anyone buy a DST?
Imagine you've owned an apartment building for 20 years.
You bought it for $1 million. It's now worth $3 million. You've collected rent, depreciated the property, and accumulated a substantial unrealized gain (along with substantial brain damage from dealing with plumbing emergencies, roof leaks and your local legislators).
You're ready to retire from the landlord business.
Selling outright is simple, but expensive. Depending on your tax basis, depreciation history, state of residence, and income, a meaningful portion of your proceeds could go to taxes.
Section 1031 of the Internal Revenue Code offers an alternative: exchange your investment property for another qualifying real estate investment and defer recognition of the gain.
It isn’t the only deferral tool. We looked at Opportunity Zones here:
⏰ The problem is the clock.
You generally have 45 days to identify replacement property and 180 days to complete the exchange, subject to the applicable tax-return deadline. That's not much time to find, underwrite, negotiate, finance, and close on another building.
And after all that, congratulations! You're still a landlord.
Enter the Delaware Statutory Trust.
Under IRS Revenue Ruling 2004-86, a properly structured DST interest can qualify as an ownership interest in real estate for Section 1031 purposes.
Here’s how it works:
A sponsor acquires properties, packages them into a trust, and sells fractional beneficial interests to investors completing 1031 exchanges.
You buy an interest in a trust that already owns properties (instead of buying another building outright).
The properties are professionally managed, investors receive their share of income, and the tax deferral can continue. You get out of managing real estate without getting out of owning real estate. That's a pretty compelling proposition, am I right??
Why investors choose DSTs, and what they surrender
It’s not all unicorns and roses with DSTs. There are very clear benefits, but they come with some drawbacks: