Insights by Fortitude Investment Group

DST Investors Find Relief in New Internal Revenue Code Procedure

Written by Daniel Raupp | Jun 15, 2020 6:15:00 PM

In one of our earlier posts, we highlighted a new IRS Notice 2020-23 issued on April 10, 2020, and identified as, “Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic.” This updated procedure provided immediate and badly-need relief for 1031 exchangers who were finding it challenging to meet the 45-day property replacement identification requirement due to the shut-down restrictions imposed by the coronavirus.

As ensuing months unfolded and as the aftershocks of the COVID-19 pandemic continued to wreak havoc on essentially every industry, it had become evident there were other areas in commercial real estate that have been exposed to even greater challenges and that would require regulatory intervention.

Perhaps the fastest moving and most wide-spread actions have been in the realm eviction protection and moratoriums protecting both residential and commercial tenants who have sought rent relief or forbearance as individual incomes and corporate revenues dried up during  nearly universal stay-at-home restrictions. The patchwork of protections extended to tenants at a federal, state and even local level are varied, confusing and can change frequently. But it is important to recognize, the emphasis so far, has been on helping to protect tenants while virtually no measures have been put forward to protect landlords or owners. Until now.

Relief for DST Investors

In the IRS’s most recent action, Revenue Procedure 2020-34 extends certain temporary safe harbors to entities that hold real property as trusts, including Delaware Statutory Trusts (DSTs). The procedure was published because of the financial hardships real estate trusts have encountered due to the impacts of the COVID-19 emergency, and because of certain limitations these trusts must currently abide by which restrict their ability to modify mortgage loans and leases, or to secure new capital.

Under current tax law, the trustee of a DST is prohibited from:

  • Exchanging property for other property
  • Purchasing assets other than the short-term investments
  • Accepting additional contributions of assets (including money)
  • Renegotiating the terms of the debt used to acquire the property
  • Renegotiating the lease with tenant except in the case bankruptcy or insolvency

Obviously, with so many individual, corporate and retail tenants struggling to make rent payments in this environment, rule-constrained DSTs—and many DST investors—have seen significant declines in revenue, yet they have had little ability to take action to address these shortfalls. Revenue Procedure 2020-34 provides some relief in three important areas:

  1. Modification of mortgage loans that secure the trust’s real property, that the trust requested, or agreed to, between March 27, 2020, and December 31, 2020 and that were granted as a result of the trust experiencing a financial hardship due to the COVID-19 emergency.

  2. Modifications of real property leases that have been entered into by the trust on or before March 13, 2020, and where the modifications have been requested and agreed to on or after March 27, 2020, and on or before December 31, 2020.

  3. Acceptance of cash contributions that are made between March 27, 2020, and December 31, 2020, as a result of the trust experiencing financial hardship due to the COVID-19 emergency, and provided the contribution is needed to increase permitted trust reserves, to maintain trust property, to fulfill obligations under mortgage loans, or to fulfill obligations under real property leases.

We believe these actions provide DST investors important protections as trustees are now empowered with the flexibility to make the necessary rent, lease, and capital raise adjustments to help weather through this temporary downturn.

At Fortitude Investment Group, we know how important it is to inform DST investors of new regulatory actions and developments and how they may be impacted. This IRS action was a big one and badly needed. 

If you have any additional questions about Notice 2020-34, please contact our team. You can also schedule a meeting for us at a time that is convenient for you here. We would be pleased to assist.