Is a Delaware Statutory Trust Right for Me?

Step 1 – Determine Your Financial and Lifestyle Objectives

Real estate can be a tremendous investment for many reasons. Few assets can simultaneously generate income potential, appreciation, and shelter cash flow from income tax through depreciation. Furthermore, owners can influence their investments by choosing tenants, investing in improving the property, and refinancing the property when advantageous. Along with these positive elements comes variability in the level of income potential from year-to-year and month-to-month, management effort, regulatory risk and concentration risk. While controlling and managing your real estate may be one of the best ways to build wealth, it may not be the best fit as an owner begins to place greater value on stable potential income, diversification, estate planning, and free time. We encourage all owners to reflect on and evaluate the following objectives:

• Income – How much income do you both currently have and want? How important is income stability to you?
• Appreciation Potential – Are you focused on growing your investments?
• Desire to Actively Manage Property – Do you enjoy managing properties? Who would manage your properties if something were to happen to you?
• Preservation of Capital – Are you concentrated in one property type and/or one geographic area? Do you have the investment timeline to hold through a full real estate market cycle?
• Estate Planning – Are your properties staged for an eventual transition to beneficiaries? Will your beneficiaries have to co-own and manage properties together?
• Risk Tolerance – Are you diversified? Do you feel comfortable with factors outside your control such as the landlord-tenant laws or potential re-zones? 
• Tax Mitigation – Do you have depreciation remaining in your properties?

Objectives should be evaluated based on not only what you are looking to accomplish today, but also over the coming years and decades. One thing we cannot stop is the passage of time, which means owners must consider the future right now in order to be staged for success down the road.

Step 2 – Evaluate Your Properties

Once an owner has determined their objectives, the next step is to evaluate whether their current properties meet those objectives. By no means is this an “all or nothing” decision. Some properties may have a strong history of low management effort, stable income potential, appreciation, and little deferred maintenance. For others, this may not be the case. If income is an objective, a worthwhile exercise is to review your most recent tax return and compare the net cash flow from your Schedule E (if the property is 100% owned by you) or K1 (if the property is owned in a partnership or multi-member LLC) to the net equity in the property. The net equity can be calculated by taking the property’s estimated value and subtracting any outstanding loan. This figure, expressed as a percentage, is the property’s ROE (return on equity). If the ROE is below 5%, from our experience there may be other options, such as Delaware Statutory Trusts when suitable, that have the potential to enhance your income. Note, when performing this analysis there should be an expense taken for management, even if you manage the property yourself. Your time has value and the cost of your time should be considered and reflected in the analysis.