(This story was updated on Feb. 2 to reflect an additional multifamily property Passco sold in 2021.)

Real estate investments made through Delaware Statutory Trusts are soaring to records as the ownership structure that wealthy individuals use to shelter capital gains from federal taxes is adopted by aging baby boomers ready to quit managing their properties and rely instead on a passive income.

The capital raising is so strong among the trusts that it’s drawing new attention from major companies that don’t even offer the investments. For example, in January commercial real estate finance powerhouse Greystone took a minority stake in Passco Cos., regularly one of the five firms that most actively offer Delaware Statutory Trust securities to investors.

Sponsors such as Passco last year filed a total of 211 new trust offerings seeking to raise more than $8 billion, according to a search of Securities and Exchange Commission filings by CoStar News. The total to be raised is more than double the amount targeted in the two previous years combined. As the interest in the trusts surge, the oldest baby boomers are turning 76 this year.

“Last year was off the chart,” Louis Rogers, founder and CEO of Capital Square, another of the five largest sponsors specializing in tax-advantaged real estate offerings, told CoStar News in an interview. “The major factor is the demographics. People like me ... an aging baby boomer, are the largest age cohort in the history of time. And we own trillions of dollars of highly appreciated investment real estate. We’re getting older, and we want to rid ourselves of what people call the three T’s: tenants, toilets and trash.”

These investors want to dispose of their real estate without paying capital gains taxes. Delaware Statutory Trusts offer a solution through 1031 tax exchanges, Rogers said. Richmond, Virginia-based Capital Square securitized about $8 billion in 1031 exchanges last year on behalf of investors.

A 1031 property exchange, named after Section 1031 of the U.S. Internal Revenue Code, gives investors the ability to shield capital gains from federal taxes from property sales so long as the gains are put back into a similar property.

A few years ago, investors could do that by reinvesting on their own in triple-net leased property, such as a Walgreens pharmacy, where the tenants would be responsible for taxes, insurance and maintenance, according to Rogers. But the run-up in prices of low-risk real estate leased to single tenants has put that option out of reach in many cases.

So investors are turning to Delaware Statutory Trusts, dating back to 1988, that were created as separate legal entities under the laws of Delaware to hold commercial real estate. Offerings allow multiple investors to pool their gains to invest in one property and still satisfy tax requirements. Oftentimes, they can get in for as little as $50,000 and still take part in multimillion-dollar acquisitions, Rogers said. The IRS approved the trusts for 1031 exchanges in 2004.

“They’re completely totally passive investment, just like stocks and bonds,” Rogers said. “The sponsor, in our case Capital Square, does all the work and the investor receives a monthly distribution. A sponsor finds the property, conducts the due diligence, interviews the tenant, inspects the route, does everything, orders all the third-party due diligence, negotiates the loan.”

The trusts are expected to gain steam in 2022 because they are considered relatively easy to use, according to Larry Sullivan, president of Irvine, California-based Passco, in an email to CoStar News.

Some of last year’s activity relates to a rebound from the effects of the pandemic and a temporary emphasis on 1031 exchanges early on as the market anticipated some Biden administration tax law changes. Those changes never materialized, but the Delaware Security Trust sector continued to attract unprecedented amounts of capital.

“Our January 2022 transaction velocity has produced a record month for fundraising, surpassing January 2021,” Sullivan said. Assuming there are no "shocks to the system, we project 2022 fundraising to remain strong and resilient.”

The risks of investing in Delaware Statutory Trusts are not unfamiliar to investors approaching retirement. They still involve tying up capital for long periods of time in assets that are not as easily sold as stocks and bonds, and the outcome of which depends on the success of the property and the sponsor.

Both Passco and Capital Square have been involved in the trusts for more than a decade. Both have seen many of their investments go up, down and back up again. Properties the two firms sold last year were held for five to seven years, according to CoStar data.

Passco sold 12 multifamily properties last year of which CoStar data shows the firm’s previous purchase price on 11. Passco sold those 11 for $851 million — $273.5 million more than what was paid initially. Capital Square sold five properties for a combined $304.6 million — $121.2 million more than what it paid, according to CoStar.

Passco completed $1.7 billion in property purchases last year, Sullivan said, and is looking to grow that with its new partner, Greystone. Passco aims to use that investment and Greystone’s network of clients and resources to surpass its 2021 activity.

“Passco more than doubled its growth between 2019 and 2021, and we expect to achieve similar growth multiples in the year ahead,” Sullivan said.

While the trusts can be used for any commercial property, activity has focused on multifamily, an asset type currently a favorite among investors.

In the past four weeks, Capital Square has filed for three new offerings backing recent multifamily acquisitions, according to SEC filings:

• CS1031 One Riverside Apartments DST, backing its $84 million acquisition of the 280-unit One Riverside Apartments in Chattanooga, Tennessee.
• CS1031 Artistry at Winterfield Apartments DST, backing its $62.2 million acquisition of the 200-unit Artistry at Winterfield in Midlothian, Virginia.
• CS1031 Capstone at Banks Crossing Apartments DST, backing its acquisition this month of the 234-unit Capstone at Banks Crossing in Commerce, Georgia.

SEC filings show Passco issued two new offerings in the past four weeks: Passco Sweetwater DST and Passco Woodland Lakes DST. Under SEC regulations, Passco is not allowed to disclose any additional information.