The Value of Fund Administration for DST Sponsors

The Delaware Statutory Trust industry is booming, but as the market grows, sponsors will need to adopt institutional-grade solutions for compliance and investor relations.

After a down year in 2023, the market for Delaware Statutory Trusts (DSTs) rebounded in 2024. The industry raised nearly $5.66 billion, a 12% increase over the previous year. DSTs have become increasingly attractive to property owners looking to perform Section 1031 like-kind exchanges into passive investment vehicles.

As the number of active DSTs grows, new players will look to enter the space, and sponsors will look to diversify into new property types. Many don’t realize how that growth will require services they haven’t considered in order to overcome scalability issues. Here are some of the biggest concerns for DST sponsors and why institutional-grade fund administration may be the answer.

Common pain points for DST sponsors

As mentioned, many investors seek DSTs because they can be used as replacement properties in like-kind exchanges. But the 1031 Qualified Intermediary (QI) industry doesn’t have a standardized protocol or set of procedures. If your DST enlists the services of a single QI for all investor exchanges, you’ll only have to adapt to one system. But if each investor is selecting their own QI, accepting capital into the trust could require dealing with dozens of different QIs that all use different procedures, software, and interfaces.

Many of your investors may also want to perform exchanges out of the trust when the time comes. Tax continuity and documentation will be required to facilitate these exchanges. Keeping track of all the data and documents, as well as dealing with the legal and accounting representatives of investors, could require additional staff if these functions aren’t outsourced to a third party.

Investors wanting to retain their Section 1031 tax deferral status so they can exchange out of the trust will require that the DST stick to proper compliance procedures, which can be restrictive. For example, “DST properties must be sold when their mortgage matures, and it’s not permissible to recapitalize or refinance.”

Sponsors also can’t raise additional capital after the initial raise, can’t renegotiate loans or leases, and any capital expenditures must be limited to specified allocations, along with other rules. Any violation of these limits would be disastrous for investors, who would lose their tax deferral status. That’s why compliance is an issue for the trust, not just the individual investors, and requires expert oversight.

Limits for cash management, expenditures, and bridge loans can affect recovery from natural disasters and other unforeseen circumstances. Risk assessment and procurement of proper insurance is of the utmost importance, making professional risk assessment another in the long list of services that sponsors will need to outsource if deemed too costly or unwise to perform in-house. Compliance, risk assessment, data integration, accounting, investor relations – how can you keep operating costs down while catering to the needs of 1031-focused DST investors?

Creating operational efficiencies – why outsource fund administration?

As a third-party fund administrator, JTC works with many types of investment managers to help them find operational efficiencies. This includes efficiencies in the onboarding process, where data from different sources can be incorporated into the DST’s general ledger quickly and accurately. And if you also use JTC as your QI, you’ll have consistent service throughout the process.

This consistency is important for compliance, risk management, accounting and distributions, and other aspects of trust management as well. Dealing with so many investors without a fund administrator could mean hiring a number of full-time or seasonal staff, all of whom need to be recruited, trained, and retained – and if not, you’ll have to go through the hiring process over again. But with JTC, our 96% staff retention rate means you’ll get consistent service from beginning to end. Just as we help private equity funds become more efficient, we can do the same for DSTs.

Dealing with today’s investors

The DST life cycle begins with fundraising, and keeping investors happy is of the utmost importance. 1031 exchange-focused investors and 721 UPREIT-focused investors have different needs and require different targeting. Developing the right plan will eliminate wasteful spending during the capital raise period.

It’s also important to make sure investors understand the investment itself and the underlying properties. As a young industry, the DST ecosystem hasn’t caught up to other investment types in terms of standardized best practices. Seeking investors from fiduciary Registered Investment Advisors compared to those coming from brokers can be very different, and ensuring the investor understands the nature of the DST (especially its holding period) is critical to avoid the kinds of issues that are sure to plague those who don’t follow best practices. Building a reputation for doing things right is the easiest way to win over investors in the future.

Today’s investors have specific expectations when it comes to information access. During a 1031 exchange, they can use JTC’s Exchange Manager portal to view the status of their exchange at any time, 24/7, from anywhere in the world. And during the life of the trust, both sponsors and investors can access key data and customizable reports, allowing investors to get the information they need for their tax returns. Not all DST sponsors do this, and it can be a major differentiator to provide investors with an institutional-grade solution like an online investor portal.

Looking to the future

As the industry matures, it’s likely that regulation will follow. Successful DST sponsors will be those that can pivot with these changes, making compliance and risk management solutions valuable to maintaining a competitive edge.

If all goes well, you’ll grow and continue to offer additional DSTs with different property numbers, types, locations, industries, and specializations (such as those focused on the growing 721 UPREIT market). That means even more investors and a need for scalability. JTC helps large alternative funds expand across sectors and global boundaries, so we can expand our relationship as needed and grow with you.

Offering additional investment products will allow you to encourage your investors to perform 1031 exchanges into another one of your DSTs. The easier it is to go from one of your DSTs to another, and the better the investor experience during the life of the trust, the more likely they’ll be to stick with you. An investor experience that remains consistent during the 1031 exchange process and the DST life cycle can do just that.

Unlike other QIs and fund administrators, JTC combines a broad range of capabilities to offer end-to-end servicing for DST sponsors. This makes us unique in the marketplace and provides a real advantage to our clients, who can utilize our customizable solutions and sector-specific expertise to position themselves for success now and in the future.