The IPA today submitted a letter to the Internal Revenue Service (IRS) and the U.S. Treasury Department (the Treasury) supporting an urgent request for relief for Delaware statutory trusts (DSTs) made by member firms Baker & McKenzie and DLA Piper on behalf of the industry.
Based on a 2004 IRS ruling, DSTs are restricted from modifying terms of existing debt obtained by the DST, accepting additional capital contributions, and re-leasing the real property owned by the DST except in the event of the bankruptcy or insolvency of the tenant. Under normal market conditions, compliance with these provisions is fairly easy and DSTs maintain steady cashflow from tenant rent payments under leases at the property level (or rent payments from the master tenant, if applicable).
As we begin to realize the full economic shock of the COVID-19 pandemic, especially its impact on global real estate markets, it’s clear that DSTs are at a distinct and immediate disadvantage with respect to their ability to adjust to the current and unexpected economic climate. In order to allow DSTs the ability to protect the investments of their beneficial owners, the request submitted by Baker & McKenzie and DLA Parker, which the IPA supported today in a separate letter to the IRS and Treasury, asks that DSTs be afforded temporary flexibility to forego the above-mentioned restrictions normally enforced under the 2004 IRS ruling. We request that the relief begin immediately and extend through October 31, 2020 so that DSTs can protect the investment of their beneficial interest owners.
Additionally, the request alternatively asks that the IRS allow DSTs the ability to spring to an entity taxed as a partnership (e.g., limited liability company), which would be able to take the required actions to maintain adequate cashflow and protect investors.
We encourage our members to reach out to their own contacts at the IRS and Treasury to support this critical relief.
If you have any questions, please don’t hesitate to reach out to myself or Tony.
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives