Delaware Statutory Trust Act: How to Buy an Airline at No Risk!

This is article may appeal to the amateur historians and aspiring empire builders in all of us. We're going to break down the Delaware Statutory Trust (DST) in a fun way: by explaining how you can use one to buy an airline at no risk. But first, a little legal context is necessary. We'll make this relatively painless.

"Common Law” was conceived with the Magna Carta 800 years ago.  80 years later it was born and given the name that evolved into the foundation for our U.S. Constitution, our court system, public policy, and Western Thought.  Over the past centuries, the simple and obvious concepts of justice – “what is right” - have been complicated by the invention of the printing press, the Industrial Revolution, universal suffrage, the Internet, politicians, and (coincidentally?) the need for indoor plumbing.

“Common Law”, after so much time, has yet to keep pace with society, technology, or commerce. Much like “common sense” or “common knowledge,” many laws are reduced to the individual opinion or interpretation of well-spoken lawyers, sympathetic judges or random jurors.  “Common”, when shared by anyone and everyone, quickly loses its value and becomes impotent.

Background and History of the Delaware Statutory Trust Act

“Common Law” in the U.S. had, for many years, prohibited corporations from investing in real estate ventures.  Massachusetts first recognized the concept of a Business Trust (MBT) in “Common Law”.  Because corporations were prohibited from active trade or investment in real estate, the laws were easily changed with a bit of wordplay.  As usual, in 1988, Delaware again exhibited its “business-friendly” reputation and proved why the state has more business registrations than residents.  What was the “Massachusetts Model” was improved, “codified” (put into writing), and is now commonly referred to as the “Delaware Statutory Trust Act” – or DST, for short.

There are significant similarities between a DST and an (S)LLC, Corporation, LLP, and other alphabetically “bankruptcy remote” structures that offer varying degrees of tax benefits, conservation of assets, limited liability, and anonymity.  There is one critical, primary, the distinction between a Statutory Trust and more traditional, more familiar organizational structures. DSTs were created to circumvent “Common Law” related to corporate involvement with real estate.  Corporations are “businesses”.  DSTs are not.  There are no Articles of Incorporation, required shareholders’ meetings, minutes to be recorded, or periodic reports (public information) in establishing a DST.

Both can buy and sell goods and services; both can sue and be sued.  Both may or may pay taxes.  But somewhere along the line, the Delaware legislature, the courts, and even the I.R.S. have re-invented the same language and legal foundations handed down from our English ancestors of centuries ago.

Don’t allow the title of this article, or the statutes, to mislead you.  The simplicity, flexibility, and protection of the Delaware legislation are available to residents of any state (or country), not only those who live in Delaware.  Businesses organized under other classifications can also participate.  The only restriction is that the (or at least one) Trustee and Registered Agent have a presence in the state of Delaware.

Common Delaware Statutory Trust Definitions  

1.“Governing Instrument” or “Trust Agreement”

These are interchangeable terms for the same required contract that defines a Delaware Statutory Trust (DST).  Imagine a Super Bowl with a twist: each owner, referee, team, and player are allowed to create a brand new, mutual agreement on any element of the game before the coin toss. Well, subject to the limits of public policy and existing law, participants of a DST have, essentially a blank check in exercising their “freedom of contract”.

Not enough time or space can be spent here emphasizing how critically important this first piece of paper is to the success of any DST enterprise or venture.  Due diligence, comprehensive discussions among all potential parties, and anticipation of contingencies are secondary only to consultation with, guidance from, an experienced, professional, specialist in real estate investment, current and evolving law.

To the extent that written (statutory) law is taking precedence over “Common Law”, those same codes and the courts have been very specific in emphasizing that enforceability of that contract is the primary intent and the highest priority of the enacted law.

2. More on the “Governing Instrument” or “Trust Agreement.”

This information is important enough to be re-read and independently researched by any serious investor.

In subsequent articles of this multi-part analysis, there will be more than enough terminology, with in-depth explanations and treatment:  “(Trust) Series,” “Trustee,” “REIT,”  “1031 Exchanges,” “Beneficiary / Beneficial Owner,” “Fractional Equity,” “Bankruptcy-Remote,” and many other phrases that will impress any guest at the next cocktail party.

Discussions will include numerous advantages, multiple structural variations, explanations of how a single entity can have different Trustees, Managers, and Equity Owners, and – most importantly – specific examples of just how flexible #1 can be in providing safety and anonymity in asset protection.

3. Leveraged Leasing Transactions

These can exemplify the diversity of DSTs, far beyond real estate investment.  Case in point: the financing of commercial airline inventory.  A trust is established to retain the title on the plane(s).  Management of that trust is under a DST. The carrier airline would be a designated beneficial owner, who flies and maintains the aircraft and is responsible for paying the note on the financing.  Obviously, the lender makes money as well.

So, if one of our imaginary planes gets misplaced or stolen, which party would be responsible for replacing the plane?  Well, assuming everyone had operated in good faith, the answer is no one.  The Delaware statute was designed to uphold the sanctity of the contract (Trust Agreement / Governing Instrument), which was designed to protect the respective parties.

In the world of real estate investment, matters can be much simpler.  After all, it’s very difficult to steal or lose a building.