How do Exchanges of Delaware Statutory Trusts Work?

In this 1031 FAQ video, Jeff Peterson explains how exchanges of Delaware Statutory Trusts work. Watch more 1031 educational videos here.

Video Transcript:

When people are doing 1031 exchanges they're very nervous about finding, designating, and receiving the replacement property within the timeframes allowed.

Remember, you've only got 45 days to identify in writing what you want to receive and 180 days to complete the purchase. Both of those deadlines run concurrently from the day after the closing of the relinquished property.

So sponsors or syndicators of real estate Investments have derived a new way to fashion real estate called a Delaware Statutory Trust. What they typically do is acquire a number of high-grade commercial properties in a little portfolio and have those titled under the name of the trustee.

The advantage is that when people buy into those trusts the beneficial interests in the trust are deemed to be an allocated interest in the underlined real estate. So if I contribute 15% of the purchase price I would be deemed to be an owner of 15% of the underlying real estate.

The Delaware Statutory Trust model really derived as an evolution from the old tenant-in-common ownership. Tenant-in-common syndicators would sell fractional interests in specific property and give each of the owners a deeded fractional interest. But the tenant-in-common model did not work very well because oftentimes tenant in common decision making requires unanimous consent of all of the owners which can be very unworkable when there's a difficult situation for the owners to deal with.

Furthermore under the old tenant-in-common arrangements, they were capped at 35 co-investors. Under the Delaware Statutory Trust model it's much more flexible and the administration or ownership is taken care of by one figurehead owner (the trustee of the trust).

From a lender's perspective it's much easier for a lender to get their arms around a Delaware Statutory Trust model because they only have one mortgagor to deal with rather than a plethora of co-owners in a tenant-in-common arrangement. Oftentimes the institutional lender will loan money to the Delaware Statutory Trust and the beneficial owners are not personally liable for the debt which makes these Investments even more attractive if you have to offset debt on your old relinquished property with new debt on the replacement property. If you have to take out at it might as well be dead that you're not personally liable for.

  • 1031 Hotline: If you have questions about Delaware Statutory Trusts, feel free to call me at 612-643-1031.

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