A Closer Look at Delaware Statutory Trusts
At Spartan Investment Group, we manage around 65 facilities in some of the highest-growth markets in the country.
Our deals are ultimately close-ended — meaning that, at the end of a property’s hold period, we’ll deploy an exit strategy such as a sale or refinance to enable our investors to cash in on the asset’s enhanced value. However, we sometimes encounter a property that performs so well, it can be hard to let go of.
One such asset is FreeUp Storage Corsicana. This 120,000 sq ft property includes 969 rentable units and is located in an exceptional market. Corsicana, Texas, is a warehouse and manufacturing hub in close proximity to Dallas, Fort Worth, Arlington and Waco, with two major railroads running through it.
Spartan has owned the property for over four years, and during that time, it has consistently exceeded our pro forma projections. That’s why, as we approach the end of our hold period, we’re transitioning this facility into a Delaware Statutory Trust (DST).
What is a DST?
A DST is a real estate ownership structure that lets multiple investors hold an undivided beneficial interest in a trust. DSTs permit individuals to pool resources and invest in institutional-quality facilities — assets they could likely not purchase alone.
What makes DSTs stand out, though, is that they qualify for 1031 exchanges. A 1031 exchange is a real estate transaction that allows investors to defer capital gains taxes when they roll the proceeds of their deal into “like-kind” business, income or investment properties.
By transferring FreeUp Storage Corsicana into a DST, Spartan can enable current investors to continue participating in the property. At the same time, new investors can join the deal via a 1031 exchange, as a cash investor or through a self-directed individual retirement account (SDIRA).
How DSTs Help Investors
DSTs can be a solid option for a variety of investor profiles. They are particularly popular with real estate investors managing their own properties, such as multi-family or apartment buildings.
Because DSTs are eligible for 1031 exchanges, they allow these individuals to roll over profits when they sell a property. In doing so, they can defer the capital gains taxes typically due on these transactions.
Our FreeUp Storage Corsicana deal affords current investors the chance to do the same, deploying their initial proceeds from the deal. Since they can defer taxes, they’ll preserve the maximum amount of capital for reinvestment.
Risk-Adjusted Returns
The FreeUp Storage Corsicana DST also opens doors for cash and SDIRA investors. Accredited investors seeking a one-off deal can participate by investing in cash. Once subscribed, they will enjoy the same advantages as other investors, including consistent monthly income and upside potential from the asset’s eventual sale.
Since this deal does not utilize debt, it also provides a unique opportunity for SDIRA investors to tap into healthy risk-adjusted returns. In fact, thanks to a low break-even occupancy rate and no leverage, this asset represents an excellent risk mitigation platform for any investor looking to diversify their portfolio.
Like any deal, a DST can still carry risk. On average, the hold period for a DST investment is five to seven years, although this can be shorter or longer. This means investors commit their funds for a certain period, introducing an element of liquidity risk.
In addition, the success of a deal relies on the investor identifying an experienced operator who knows how to navigate the market. As a result, it is essential that DST investors practice due diligence and select an operator whose values align with their own.
A Strategic Approach
At Spartan, we recognize the advantages of having multiple exit strategies. By taking a longer route for FreeUp Storage Corsicana, we can extend liquidity to existing investors and establish a new pathway for those who wish to remain engaged with the property.
Many syndicators only buy properties to sell them. But at Spartan, we take a nuanced approach to deal management. We assess the risks and benefits of each possible outcome and tailor the solution to the deal. While sales can provide an influx of capital for our investors, they carry tax liability.
Along with offering our investors an opportunity to reduce their tax burden while enjoying steady cash flow and strong returns, holding onto this high-performing facility will contribute to the ongoing growth of our REIT-quality portfolio.
We recently constructed two additional buildings at the location. And as occupancy increases, we’ll have the chance to raise rents to market levels, augmenting the existing cash flow. As we continue to lease up FreeUp Storage Corsicana, we look forward to sharing its success with our investor network.
Want to learn more about investing in DSTs? The Spartan team recently hosted a webinar breaking down the structure of the FreeUp Storage Corsicana deal.
Watch the session below or schedule a call with a member of our Investor Relations (IR) team.
Spartan does not give tax, legal or investment advice. Please seek outside counsel from your CPA or attorney before making any tax, legal or investment decisions.
