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Drafting a DST Master Lease
In the May 2015 issue of this publication, we discussed the conversion of tenancies in common (TICs) to Delaware Statutory Trusts (DSTs) as a means of refinancing real estate projects with maturing loans while preserving the ability of the original TIC investors to dispose of their investment through a like-kind exchange in the future, and the general benefits and risks associated therewith. (See http://bit.ly/1kcJsDL.) In this article, we discuss some considerations for drafting master leases for DSTs utilized in like-kind exchanges.
A DST is a separate legal entity created as a trust under Delaware law. The importance of DSTs in connection with like-kind exchanges can be traced to Rev. Rul. 2004-86, in which the IRS ruled that an interest in a DST constituted good replacement property in an otherwise qualifying like-kind exchange involving real estate. (Note: This article focuses on the use of DSTs as part of like-kind exchanges, and particularly on syndicated offerings of DST interests to investors looking to engage in a like-kind exchange. DSTs obviously have a variety of uses outside this context to which the limitations discussed in this article may not be relevant.) This conclusion was based on the fact that: 1) the restrictions on the powers of the DST described in the ruling caused it to be classified as a trust rather than as an association or partnership for tax purposes; and 2) the trust should be disregarded for U.S. federal income tax purposes.
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