Darryl Steinhause, a partner with DLA Piper (US) LLP, joined with Daniel Cullen, a partner with Baker & McKenzie, LLP, and submitted a joint letter on April 14, 2020 (the “Letter”), requesting emergency relief on behalf of all Delaware Statutory Trusts that own real property (“DSTs”).

The Letter, which was submitted to the U.S. Treasury and the Internal Revenue Service (“IRS”), requests permission for DSTs to undertake certain actions otherwise prohibited under applicable IRS Revenue Rulings. The Letter requests that DSTs be permitted to rely on the relief requested (if granted) through October 31, 2020.

The Letter requests three primary types of relief:

               1.            Modifying Leases:
               A DST is prohibited from renegotiating leases originally entered into by the DST except in the case of the tenant’s bankruptcy or insolvency. A large number of DSTs that own real property have received requests to modify the terms of the leases in order to remain viable.
              
               The Letter requests permission for DSTs to modify the terms of their leases, whether with third party tenants or master tenants, to allow for a lease restructuring or reduction in rental payments.

               2.            Loan Modifications:
               DSTs are believed to have approximately $11.5 billion of outstanding loans. Lenders have signaled that they are willing to work with borrowers to modify the terms of their debt, and DSTs would like to take advantage of modifications that are being made available to other borrowers.  However, DSTs may not renegotiate the terms of debt used to acquire property owned by the DST.

               The Letter requests permission for DSTs to pursue loan modifications with respect to financing obtained by the DST.

               3.            Acceptance of Additional Capital Contributions:
               A DST may not exchange property owned by the DST, purchase assets (other than certain short-term investments) or accept additional capital contributions (including money). The inability of a DST to accept additional capital contributions makes it particularly vulnerable to abrupt changes in the economy which significantly reduce the cash flow generated by at properties owned by the DST. In addition, many lenders will consider modifications to a loan only where additional capital is contributed by the borrower.

               The Letter requests that DSTs be permitted to accept additional capital contributions.
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The Letter concludes with a request that, in the event that the IRS is not able to waive these prohibitions, DSTs be permitted to convert (“spring”), into entities taxed as partnerships (e.g., limited liability companies), which would be able to take the otherwise barred actions. The Letter seeks confirmation that, provided that the property entity converts back to a DST within 6 months, the DST be considered an investment trust going forward. 

All ADISA members are encouraged to find ways to support the relief requested in the Letter, whether through their own efforts or through an association or group that they are a part of. Separately, ADISA will submit a letter to the IRS and the Department of the Treasury in direct support of the joint Steinhause/Cullen request.

Sincerely,

John H. Grady, Practus LLP
ADISA Legislative & Regulatory Committee Chair