Successful DSTs involve many investors performing 1031 exchanges, and having a QI you trust can stop problems before they start.
Over the past decade, Delaware Statutory Trusts (DSTs) have become increasingly popular among investors, with the industry’s high-water mark being 2022, when DST sponsors raised a reported $9.2 million. As noted in an article from Alternative Investments Quarterly, “Investors, both domestic and foreign, have increasingly pursued these asset classes as they performed well over the past decade and appear to have longer-term tailwinds.”
DSTs have become especially attractive to investors performing Section 1031 like-kind exchange transactions, as DST interests can be used as 1031 replacement properties for tax deferral purposes. According to AI Quarterly, “DSTs have become widely recognized as viable replacement-property options for 1031 investors wanting to transition from active to passive real estate ownership.”
Property owners who’ve used 1031 exchanges as part of their retirement planning strategies have found DSTs to be a great way to diversify and create passive income without losing their tax deferral status. DSTs also offer access to large-scale commercial real estate (which can perform strongly in inflationary periods) and provide a reliable backup option for exchangers in competitive real estate markets. These advantages became key over the last two years, when rising prices, high interest rates, and inflation all affected the real estate market while highlighting the benefits of DSTs.
While the industry has seen lower deal volume over the past two years, most experts predict that interest rates will go down by the end of 2024. When that happens, 1031 investors who had been waiting for interest rates to lower may be ready to take action on a planned exchange, providing opportunities to active DST sponsors.
DST asset managers looking to grow by taking advantage of 1031 investment need to be prepared for the expanding infrastructure needs that come with that growth. A single DST can have up to 499 investors, which can potentially mean 499 separate 1031 exchange transactions into the DST. The larger the DST, and the more DSTs you manage, the more 1031 exchange transactions you’ll have to deal with.
Some investors only perform one 1031 exchange every few decades, meaning they might not have a consistent team or even a full understanding of how exchanging into a DST is supposed to work. The best way to attract and keep those investors is by providing them with a stress-free experience. So how can DST sponsors accommodate a growing number of 1031 investors and make the process less error-prone and more convenient for investors? It starts with having a good Qualified Intermediary.
The need for a single Qualified Intermediary
Every 1031 exchange requires a Qualified Intermediary (QI) to hold the proceeds from the exchanger’s property sale during the exchange. Funds are then transferred to the DST to complete the exchange. This must be done according to 1031 rules, or else the exchange will be deemed invalid and the exchanger will be unable to defer taxes on the sale. If a mistake is made by the QI that invalidates the exchange, it can be catastrophic for an investor who would then be forced to pay taxes they’d hoped to defer.
As a DST sponsor, it’s in your best interest to concern yourself with which QI your investors use. If every investor uses a different QI, you’ll have to accommodate each QI’s methods and system, which can be time-consuming and might even require additional staff on your end just to interface with each QI and deal with the necessary documentation.
Additionally, not all QIs are created equal, and it’s possible one (or many) of your investors will make the wrong choice and go with a cheap, unreliable option. You don’t want that to happen, but you can’t possibly monitor every QI to make sure no mistakes are made. The solution? Choose a single, reputable QI you can recommend to all your investors.
By having a single QI, you’ll have ONE company to interface with, ONE system to integrate, and ONE number to call when there’s an issue. If you make the right choice, you can heave a sigh of relief knowing your investors’ needs are being taken care of, keeping your reputation intact.
But not every QI is equipped to handle DST exchanges, and certainly not on the scale a growing sponsor requires. What DST sponsors need is an institutional-grade solution, a company that can handle not only simple 1031 exchanges, but ALL types of exchanges on a significant scale.
The 1031 exchange team at JTC has decades of experience working with all types of exchanges, from small single-family rental properties to large commercial real estate. We specialize in complex scenarios like reverse exchanges, multi-property exchanges, state-to-state and foreign exchanges, or those involving multiple DSTs. As a global company, we can handle the workload while still delivering personal client service with a single point of contact. What’s more, we’ve proven our ability to do things the right way.
The importance of best practices in 1031
There are many ways a QI can mess up even a single 1031 exchange: incorrectly structuring accounts, allowing the exchanger to take constructive receipt of funds, not making transfers on time and missing exchange deadlines, commingling exchange funds with operating funds, not providing a proper paper trail, or transferring funds without authorization. All of these things can lead to issues for both investors and the DST. Unhappy investors probably won’t work with you again, but happy ones will, and the way to keep them happy is to match them with a QI that cares about best practices.
JTC has a longstanding commitment to 1031 best practices. We’ve pioneered advances in transaction security, transparency, and regulatory compliance that have since become industry standard. At JTC, exchange funds are only held in FDIC-insured, fully-liquid qualified escrow accounts, and any fund movement requires dual authorization from both JTC and the exchanger. We also supply errors & omissions and cyber insurance and a fidelity bond for added protection.
Exchangers are given access to JTC’s cloud-based Exchange Manager portal, which provides 24/7 access to exchange information from anywhere in the world. Documents are stored online so they can be viewed at any time. We also subject our processes to yearly SOC 1 Type 2 audits to ensure we live up to the high standard we’ve set.
Promoting 1031 exchange best practices will only strengthen the DST industry. As said in the AI Quarterly article, “All participants in the DST ecosystem can and should work together to keep the DST market healthy and attractive for 1031 investors for decades to come.”
If only we could count on others to do that, we would have a thriving industry free of problems. But since we can’t, committing to using a QI that adheres to best practices will be a differentiator in the DST space that can attract investors.
Combining 1031 expertise with DST capabilities
One thing that sets JTC apart as a QI is that we do more than 1031 exchange transactions. JTC also offers institutional-grade fund administration to a variety of fund types, including Delaware Statutory Trusts. We can provide trust services, third-party fund administration, QI services for investor exchanges into and out of the trust, and more, giving our DST clients the option for a true end-to-end experience.
DST sponsors serious about growth should think about the needs of their investors, and we can tell you from experience that investors want the same things you do: they want simplicity, security, transparency, peace of mind, and great customer service. By partnering with JTC, DST sponsors can give that to their 1031 exchange investors and receive the same service themselves as they pursue their ambitions.
To learn more about JTC’s services for DST sponsors, click here.
