For real estate investors seeking to defer capital gains taxes while transitioning into institutional-quality industrial properties, the Delaware Statutory Trust (DST) structure has emerged as a powerful and flexible tool. At Phoenix Industrial Redevelopment (PIR), we’ve developed our 1031Funds Program® specifically to help investors leverage this revolutionary structure to gain exposure to the thriving small-bay industrial market without the management headaches of direct ownership.
The 1031 Exchange Challenge
The 1031 exchange provision of the tax code has long been a cornerstone strategy for real estate investors. By allowing the deferral of capital gains taxes when proceeding from one “like-kind” property to another, this provision helps investors preserve capital for continued wealth building rather than surrendering a significant portion to immediate taxation.
However, traditional 1031 exchanges come with significant challenges:
Tight Timelines
Investors must identify potential replacement properties within 45 days and complete the acquisition within 180 days—often creating rushed decisions and compromised due diligence.
Management Burden
Direct ownership of replacement properties means continued property management responsibilities—precisely what many investors are trying to escape, particularly as they approach retirement.
Concentration Risk
The capital from a sold property often needs to be reinvested in a single replacement property, creating concentration risk and limiting diversification options.
Debt Requirements
To achieve full tax deferral, investors typically need to replace the debt on their relinquished property, which can create overleveraged situations or financing challenges.
Property Selection Limitations
Finding appropriate replacement properties within the required timeframe often leads to compromises on location, quality, or price.
The DST Revolution
The Delaware Statutory Trust structure represents a genuine revolution for 1031 exchange investors, providing solutions to each of these traditional challenges. The IRS’s Revenue Ruling 2004-86 established that beneficial interests in a properly structured DST qualify as “like-kind” real estate for 1031 exchange purposes, opening up entirely new possibilities for tax-efficient property transitions.
How DSTs Work
A Delaware Statutory Trust is a legal entity created under Delaware law that holds title to one or more income-producing properties. Multiple investors can own beneficial interests in the trust, effectively creating a form of fractional ownership. When properly structured according to IRS guidelines, these beneficial interests qualify as direct real estate ownership for 1031 exchange purposes.
Key aspects of the DST structure include:
- Passive Ownership: DST investors hold beneficial interests rather than having direct management control, creating a passive investment vehicle.
- Professional Management: A professional sponsor/manager (like PIR) handles all aspects of property management and operation.
- Fractional Interests: Investors can purchase interests in appropriate sizes to match their exchange requirements rather than having to acquire entire properties.
- Pre-packaged Financing: Most DSTs come with in-place, non-recourse financing, eliminating the need for investors to qualify for loans individually.
- Institutional Access: DSTs can provide access to larger, higher-quality properties that would be beyond the reach of many individual investors.
Advantages of the DST Structure for Industrial Investors
For investors looking to transition from other real estate types into industrial properties, DSTs offer particularly compelling advantages:
Simplified Diversification
The DST structure allows investors to allocate exchange proceeds across multiple properties or property types, creating portfolio diversification that would be impossible in a traditional direct 1031 exchange. This is especially valuable when entering the industrial sector, which benefits from geographic diversification to mitigate regional economic risks.
Institutional-Quality Access
Many individual investors lack the capital or expertise to directly acquire institutional-quality industrial properties. DSTs provide access to professionally selected, thoroughly vetted industrial assets that meet rigorous quality standards.
Professional Management Expertise
Industrial properties require specialized management knowledge, particularly in the small-bay, multi-tenant segment. DST structures place property management in the hands of experienced teams (like PIR’s affiliate Grid Property Management) who understand tenant needs, market dynamics, and operational requirements.
Elimination of Landlord Duties
Direct ownership of industrial properties comes with significant management responsibilities. The DST structure eliminates these burdens, providing truly passive ownership without sacrificing the potential for attractive returns.
Debt Solutions
DSTs typically feature pre-arranged, non-recourse financing at the trust level. This eliminates the need for investors to qualify for loans individually and protects investors from personal liability on property debt.
Estate Planning Advantages
DST interests can be transferred to heirs with significant estate planning advantages, including potential step-up in basis upon death, avoiding the complications of transferring direct property ownership.
The PIR 1031Funds Program®: A New Approach to Industrial DSTs
At Phoenix Industrial Redevelopment, we’ve designed our 1031Funds Program® to maximize the advantages of the DST structure while focusing specifically on the small-bay, multi-tenant industrial sector where we’ve developed specialized expertise.
Predictable Quarterly Closing Schedule
One of the most significant innovations in our 1031Funds Program® is our predictable quarterly closing schedule (January 15, April 15, July 15, and October 15). This regular cadence provides 1031 exchange investors with certainty for planning their transactions, allowing them to identify our upcoming DST offerings well in advance of making their property sale decisions.
This schedule eliminates one of the most stressful aspects of traditional 1031 exchanges—the uncertainty about whether suitable replacement properties will be available when needed. Investors can confidently proceed with their property sales knowing exactly when PIR’s next DST offering will be available for investment.
Simplified Economic Structure
Unlike many DST offerings with complex waterfall structures and multiple classes of returns, our 1031Funds Program® features a straightforward economic arrangement:
- 5.0% Annual Preferred Return: Paid monthly through a master lease structure, providing reliable income throughout the hold period.
- 50% Participation in Property Appreciation: A true equity ownership position with substantial participation in the upside potential of small-bay industrial properties.
This clean, transparent structure aligns our interests with those of our investors—we succeed when the properties appreciate, creating a powerful incentive for effective property management and value creation.
Master Lease Advantage
Our DST properties utilize a master lease structure, where the DST leases the entire property to a PIR-affiliated operating entity. This approach provides several advantages:
- Predictable Income: The master lease ensures consistent monthly payments to the DST regardless of temporary vacancies in individual units.
- Operational Flexibility: The master tenant can make certain property decisions that would be restricted at the DST level due to IRS regulations.
- Enhanced Returns: The master tenant implements PIR’s value-add strategy to renovate the property and bring tenants to market lease rates, creating significant value through active management.
Professional Implementation of PIR’s Value-Add Strategy
When investors acquire interests in our 1031Funds Program® DSTs, they gain exposure to PIR’s proven value-add strategy for small-bay industrial properties:
- Strategic Property Selection: We target properties in the 20,000 to 100,000 square foot range with small-bay spaces from 1,000 to 5,000 square feet in growing markets with favorable industrial demand drivers.
- Comprehensive Renovation: The master tenant implements targeted capital improvements to enhance property functionality, appearance, and tenant appeal.
- Tenant Optimization: We focus on bringing existing tenants to market rental rates and attracting quality new tenants to improve the overall tenant mix and lease economics.
- Operational Efficiencies: Our affiliate Grid Property Management implements best practices in property operations to maximize NOI through both revenue enhancement and cost control.
Comparing Investment Approaches: DST vs. Direct Ownership
For investors considering industrial real estate, it’s helpful to compare the DST approach with direct ownership:
| DST Structure (PIR 1031Funds Program®) | Direct Ownership | |
| Minimum Investment | $500,000 | Typically $1-3M+ for quality industrial |
| Management Responsibility | None – fully passive | Significant hands-on requirements |
| Diversification | Can spread across multiple properties | Typically limited to 1-3 properties |
| Financing | Pre-arranged, non-recourse | Personally arranged and often guaranteed |
| Closing Timeline | Predictable quarterly schedule | Uncertain, dependent on market |
| Due Diligence | Professional pre-acquisition process | Self-conducted with time constraints |
| Tenant Relations | Professionally managed | Direct responsibility |
| Exit Strategy | Professionally executed with 1031 options | Self-directed, timing uncertainty |
Navigating the DST Selection Process
For investors considering DST investments as part of a 1031 exchange strategy, the selection process requires careful consideration of several factors:
Sponsor Quality and Track Record
The sponsor/manager of the DST is perhaps the most critical factor in investment success. Evaluation criteria should include:
- Track record in the specific property type (industrial, in PIR’s case)
- Length of operating history and performance through market cycles
- Alignment of interests through meaningful co-investment
- Transparency in reporting and communication
- Property management capabilities and systems
Property Fundamentals
The underlying real estate fundamentals remain essential in DST investing:
- Location quality and market growth potential
- Property physical condition and functionality
- Tenant quality, diversity, and lease structures
- Potential for rent growth and appreciation
- Capital expenditure requirements
Economic Structure
DST offerings vary significantly in their economic structures:
- Return priorities and preferences
- Fee structures and timing
- Sponsor promote and profit sharing
- Exit strategies and timing
- Tax reporting and consistency
Financing Terms
The pre-arranged financing in DST structures requires careful evaluation:
- Interest rate and term
- Fixed vs. variable components
- Prepayment flexibility
- Loan-to-value ratio
- Debt service coverage requirements
The PIR Advantage in DST Investing
Phoenix Industrial Redevelopment brings several distinct advantages to the DST marketplace:
Specialized Industrial Expertise
Unlike generalist DST sponsors, PIR focuses exclusively on small-bay, multi-tenant industrial properties—a niche we’ve refined over nearly a decade of operation. This specialized knowledge translates into superior property selection, tenant relations, and value-creation strategies.
Vertically Integrated Operations
Our affiliate Grid Property Management provides full-service property management, ensuring consistent implementation of our value-add approach and creating operational efficiencies that benefit DST investors.
Predictable Acquisition Pipeline
Our established acquisition system and market relationships create a steady pipeline of potential DST properties, allowing us to maintain our predictable quarterly closing schedule.
Simplified Economic Structure
Our straightforward 5% preferred return plus 50% appreciation sharing model creates transparency and aligns our interests with those of our investors.
Long-Term Relationship Focus
Unlike transactional DST sponsors, we focus on building long-term relationships with our investors, many of whom participate in multiple offerings over time, creating a cycle of tax-efficient wealth building.
Conclusion: The Future of Tax-Efficient Industrial Investment
The 1031 exchange market is undergoing a genuine revolution, with DST structures creating unprecedented opportunities for tax-efficient transitions into passive, institutional-quality real estate investments. For investors seeking exposure to the thriving industrial sector without management burdens, the PIR 1031Funds Program® offers a compelling combination of tax efficiency, passive income, and appreciation potential.
As the U.S. industrial market continues to benefit from reshoring trends, technological advancements, and supply chain restructuring, properly structured DST investments in small-bay industrial properties represent a powerful wealth-building strategy. The ability to defer taxation while transitioning into this high-potential asset class—without the management responsibilities of direct ownership—truly represents a revolutionary advancement for real estate investors.
With our predictable quarterly closing schedule, streamlined economic structure, and specialized industrial expertise, Phoenix Industrial Redevelopment is positioned at the forefront of this DST revolution. We invite qualified investors to explore how our 1031Funds Program® can help create tax-efficient paths to industrial real estate ownership and long-term wealth building.
For more information about upcoming DST offerings and our predictable quarterly closing schedule, please contact our investment team today.
