My DST Stopped Paying Distributions: What Happens Next and What You Can Do

After the reserve is spent, the loan agreement decides where the rent goes, and it is not to you

Rev. Rul. 2004-86 requires the trustee to distribute available cash less reserves and forbids it from accepting new money or renegotiating the loan, so the reserve is the only cushion and the lender's documents govern what happens when it runs out. A loan and security agreement for a multifamily DST filed with the SEC shows the machinery: all rents must be deposited into a lender-controlled deposit account within two business days of receipt, and a cash management period commences on the occurrence of an event of default.

During that period the lender may direct the bank to transfer every collected dollar to the lender, to be held in a cash collateral reserve and applied to the debt at its discretion; the borrower may draw only approved expenses, on the next payment date, against a certified monthly statement. A distribution to investors is not an approved expense. The same agreement lets the lender terminate an affiliated property management agreement if the actual debt service coverage ratio drops below 1.0 to 1.0. Ask which stage the trust is in; the leverage mechanics are on DST leverage and interest-rate risk. Where a master tenant is the cause, the same agreement lets the lender terminate the master lease once a monetary default under it coincides with a loan default; the bankruptcy timetable for a master tenant is on sponsor or master tenant bankruptcy.

Four written requests to send in the first thirty days, under a statute that obliges an answer

12 Del. C. section 3819 gives each beneficial owner the right, on written demand stating a purpose related to the interest, to information regarding the business and financial condition of the trust, subject to standards the trustees set and to limits in the trust agreement. Use the statute's words in the demand and keep a copy. Four answers change your options:

• Has an event of default been declared under the loan, and is a cash management period or cash sweep in effect? Ask for the lender's notice, not a summary.
• What is the balance of each reserve account today, what was it at the last distribution, and what replenishment has the lender demanded?
• Is the master tenant current on base rent, and has the sponsor's guaranty of that rent been called?
• Is the manager considering a transfer of the property to an LLC, a contribution to a REIT's operating partnership, a sale, or a deed in lieu, and on what timetable?

The broker-dealer that sold the interest owes you a conversation, and a written complaint starts a regulatory clock

A suspension by itself is not evidence that the sale was wrong; buildings lose tenants. The question for the selling firm is what it knew about the trust's leverage, reserves and tenant when it recommended the interest, and whether that fit the profile it built for you. Regulation Best Interest required the firm to act in your best interest at the time of the recommendation and to disclose its capacity, fees and conflicts in writing.

FINRA's guidance on complaints is to question the firm first, escalate to the branch manager or compliance department, and put the complaint in writing with copies kept. Writing matters because FINRA Rule 4530(d) requires the firm to report statistical information on written customer complaints each quarter, and Rule 4530(a)(1)(B) requires a report within 30 days of any written complaint alleging theft or misappropriation.

A complaint to FINRA can lead to discipline of the firm; it is not a claim for your money. Recovery runs through arbitration, which FINRA Rule 12200 lets a customer require against a member firm or its associated person, and which Rule 12206 closes six years after the event giving rise to the claim. Read how FINRA arbitration works for DST losses and check the firm on BrokerCheck before deciding whether a claim exists.

A 721 contribution or an LLC conversion can restart payments, and each one closes the section 1031 door

Sponsors facing a trust that cannot operate within its limits reach for two tools. The first is a transfer of the property to a limited liability company, described on the DST springing LLC, which can borrow, re-lease and accept capital and which turns you into a partner. The second is a contribution of the property or your interest to a REIT's operating partnership; under 26 U.S.C. section 721(a) no gain or loss is recognized on that contribution, so the deferred tax travels into the units. 721 UPREIT roll-ups from a DST works through the trade-offs.

Both tools share a cost: a partnership interest and operating partnership units are not real property for section 1031, so your next sale is taxable rather than exchangeable. If you took this interest to keep exchanging until a step-up at death, that is the fact to weigh, and a CPA should read the sponsor's offer with you.

Neither tool creates a market for your interest; the realistic exits are on DST illiquidity and exits, and your equity remains at risk in full until the trust is sold or its payments have resumed for a sustained period.

A hypothetical timeline from the notice, with round numbers, so you can place your own trust on it

Hypothetical: you hold a 2% interest in a trust whose property paid $400,000 a month of rent against a $150,000 loan payment. The anchor tenant leaves in January and rent falls to $220,000; February's reserve draw covers the shortfall, but by April the reserve is gone, the lender declares a default and the cash management period begins. In September the sponsor proposes a transfer to an LLC so a new lender can fund tenant improvements.

The decisions on that timeline are yours in only two places: the written demands in April, and the consent or objection to the LLC transfer in September. Everything else belongs to the lender and the manager, and your share of the trust's taxable income is reported to you for the year whether or not cash arrived; see DST tax forms and reporting. Put your own trust's dates, loan payment and reserve balance on the same grid with your CPA before you answer the sponsor.