In short
A DST closes fast because the trust already bought the building, signed the loan and the lease; you subscribe to an interest instead of buying a property.
A Delaware Statutory Trust can close in days because there is nothing left to buy. The trust acquired the building, signed the loan and signed the lease before the first interest was sold, so your closing is a subscription and a wire, not a purchase with inspections, appraisals and a lender. Our clients often close within three to five business days once documents are complete. This explainer covers the three reasons it is fast and the two things that still take time.
The building is already bought
The structure comes from Rev. Rul. 2004-86. In the ruling’s facts, the sponsor borrows on a nonrecourse note, buys the property, signs a net lease under which the tenant pays taxes, insurance, maintenance and repairs, and contributes the property to a Delaware statutory trust that assumes the note and the lease. Only then do investors exchange their own real property for interests in the trust through a qualified intermediary. The ruling holds that an interest in such a trust is an undivided fractional interest in the real property, so the exchange is “real property for an interest in Blackacre, and not the exchange of real property for a certificate of trust.”
Because the trustee’s activities “are limited to the collection and distribution of income,” with no power to renegotiate the loan or the lease, there is also nothing to negotiate at your closing. The property, the debt and the lease are fixed on day one. That is the same reason the review has to happen before you invest, which we explain in how we review a DST.
No financing contingency
A direct purchase waits on a lender: application, appraisal, underwriting, loan documents. A DST’s loan already exists, and it is nonrecourse to the trust and its owners. You do not apply for it and your credit is not underwritten. Your share of the trust’s debt still counts for the exchange arithmetic, which is how a leveraged trust covers the loan you paid off at closing; see can a DST’s loan count as replacement debt. Step 4 of our process notes that because the process avoids bank involvement, it is faster.
Subscription mechanics
DST interests are securities sold in private placements under Regulation D. Under Rule 506(b) there is no general solicitation and up to 35 non-accredited but sophisticated purchasers may buy; under Rule 506(c) the sponsor may advertise but every purchaser must be an accredited investor and the issuer must take reasonable steps to verify it, such as reviewing tax forms or statements or obtaining written confirmation from a broker-dealer, investment adviser, attorney or CPA. For an individual, accredited means net worth above $1,000,000 excluding the primary residence, or income above $200,000 in each of the two most recent years, $300,000 with a spouse (17 CFR 230.501(a)). The sponsor files a Form D notice with the SEC within 15 days after the first sale, and the interests are restricted securities that cannot be freely resold (SEC, Rule 506(b)).
Your closing is therefore three documents and one wire: the private placement memorandum, which you read; the subscription agreement, which you sign; and the accredited investor questionnaire or verification; then the intermediary wires your exchange funds to the trust. The sponsor countersigns and you own the interest. Our page on accredited investor rules for DSTs covers the verification step.
What still takes time
Two things. First, the 45-day identification wall does not move. Under Reg. section 1.1031(k)-1(b), the identification period ends at midnight on the 45th day after you transfer the relinquished property, and the exchange period at midnight on the 180th day or your return due date, whichever is earlier. A trust must be identified in writing within the 45 days, by a name that unambiguously describes it, within the three-property or 200 percent limits. Second, accredited investor verification under Rule 506(c) is usually the slowest document in the file, because a third party has to confirm it. Plan for the paperwork, not the closing, to be the long pole; see how quickly a DST can close when you are running out of time.
A hypothetical timeline
Round numbers. You close the sale on day 0 with $800,000 of equity reaching the intermediary and a $400,000 loan paid off. On day 20 you identify two trusts in writing, one leveraged and one unleveraged, with dollar amounts against each. Between days 21 and 35 you read both memoranda, complete the subscription agreements and have accredited status verified. On day 36 the intermediary wires both trusts and the sponsors countersign. You hold two interests on day 38, with 142 days of the exchange period unused. Run your own numbers with your CPA.
Speed is not safety. A DST interest is illiquid, the trust cannot raise new capital if the property needs it, distributions are not guaranteed, and the loan matures on its own schedule; those risks are set out in key DST risks and DST illiquidity and exits.
What to do now
- Start accredited verification the week your sale goes under contract, so it is done before day 45.
- Identify at least one trust in writing as a backup even if a building is your first choice; see how to identify replacement property.
- Read the risk factors and fee table of the memorandum before the subscription agreement.
- Request a proposal that shows which available trusts fit your equity and debt figures.
