Real Estate Specialist Explains Benefits of 721 UPREIT DSTs: A Unique Investment Strategy Combining Advantages of Two Worlds
In the realm of real estate investment, Delaware Statutory Trusts (DSTs) have gained popularity due to their unique features. One such aspect is the option for a Section 721 UPREIT conversion, a topic we will delve into in this article.
The Basics of DST Liquidation
In a traditional DST, investors receive cash proceeds from the sale of the real estate in proportion to their ownership when the DST goes full cycle and liquidates. This straightforward process allows investors to reap the benefits of their investment.
The Choice is Yours: UPREIT or Not?
However, some DSTs may offer the option for a Section 721 UPREIT conversion. This decision allows you to assess the REIT's performance, portfolio quality, debt exposure, and terms, along with current market conditions, before deciding whether to invest. Having the option to UPREIT or not provides a form of downside protection for individual investors.
Forced vs Optional UPREIT Conversions
A forced 721 UPREIT conversion makes investors exchange their DST interest for REIT operating partnership units, erasing the investor's option to choose whether or when to cash out or continue deferring taxes. On the other hand, an optional 721 UPREIT DST preserves investor control of exit timing and strategy, giving investors the option to participate in the 721 exchange.
By avoiding forced UPREIT provisions, investors preserve their autonomy and can make more optimal decisions at the time of sale or exchange. In an optional 721 DST, if you choose not to contribute to the REIT, you still might receive the sale payout and can do a 1031 exchange into another property of your choice.
The Advantage of Traditional DSTs
Traditional DSTs naturally accommodate a 1031 exchange at exit, allowing investors to continue tax deferral. By retaining the 1031 exit as a fallback, you can compare the benefits of joining the REIT vs using your proceeds for other opportunities.
Due Diligence is Key
We recommend conducting thorough due diligence on any DST's exit strategy before investing. Lean toward deal structures that prioritize investor optionality and transparency. At Kay Properties, our dedicated due diligence team continuously monitors key factors such as dividend coverage, leverage ratios, debt maturities, exposure to floating rate debt, and whether a tax protection agreement (TPA) is offered, and for how long.
In conclusion, understanding the differences between forced and optional Section 721 UPREIT conversions in DST offerings is crucial for making informed investment decisions. By being aware of these options, investors can make the most of their real estate investments while maintaining control over their exit strategies.
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