DST Broker for 1031 Exchange Investors

A DST interest is a security, so it is sold through a broker-dealer or a registered investment adviser

For tax purposes a DST interest counts as real estate. In Rev. Rul. 2004-86 the IRS concluded that a taxpayer may exchange real property for an interest in a Delaware statutory trust without recognising gain under section 1031, because the beneficial owners are treated as holding an undivided fractional interest in the trust's property. The same ruling fixes what the trustee may do: collect and distribute income, hold cash only in short-term government or bank obligations, and make minor non-structural repairs. The trustee may not accept new contributions, renegotiate the loan, or renegotiate the lease except on the tenant's bankruptcy or insolvency. Our glossary entry on Rev. Rul. 2004-86 walks through the ruling.

For securities purposes the interest is a private placement. Sponsors offer DST interests under Rule 506 of Regulation D, and the SEC's page on Rule 506(b) sets the terms: no general solicitation or advertising, an unlimited number of accredited investors, no more than 35 non-accredited purchasers in any 90-day period, a Form D notice filed within 15 days after the first sale, and restricted securities that cannot be freely resold. Because the offering cannot be advertised, the people who can present it to you are the registered representatives of the broker-dealers in the sponsor's selling group and investment adviser representatives. The difference between a broker-dealer and an adviser, and between a 506(b) and a 506(c) offering, is covered in the glossary.

The registrations a DST representative holds: Series 7 or 22, with Series 63 or 66

Two FINRA qualification exams cover DST interests. FINRA describes the Series 7, the General Securities Representative exam, as qualifying a candidate for the solicitation, purchase and sale of all securities products; the candidate must be associated with and sponsored by a FINRA member firm and must also pass the Securities Industry Essentials exam. The narrower Series 22, the Direct Participation Programs Representative exam, covers the solicitation, purchase and sale of direct participation programs in real estate, oil and gas and equipment leasing, including limited partnerships and LLCs, again with the SIE as a co-requisite. A representative who holds either may present a DST interest.

State registration sits on top. The Series 63 is a North American Securities Administrators Association exam administered by FINRA for agents of a broker-dealer. The Series 66, also a NASAA exam, qualifies a person in two capacities, as a representative of a broker-dealer and of an investment adviser, and FINRA lists the Series 7 as its co-requisite. So the combinations you will see on a DST representative's record are Series 7 with 63 or 66, or Series 22 with 63. What FINRA itself is, and what membership obliges a firm to do, is in the glossary.

How to check a representative on BrokerCheck before you share a closing statement

FINRA's BrokerCheck is a free tool for researching the professional background of an investment professional and of brokerage and adviser firms. FINRA's description of the report lists what an individual's record shows: employment history for the last ten years, in and outside the securities industry, taken from the person's Form U4; the firms where the person is or was registered; the qualifications section with current registrations and the exams passed; and a disclosures section covering customer disputes, disciplinary events and certain criminal and financial matters, some of which may be pending or unproven.

Search the representative's name and the firm's name separately, and read both. Check that the exams listed match the products being discussed, that the firm shown is the same one named in the member disclosure at the foot of this page, and that any disclosure has an explanation you find satisfactory. A representative who is not on BrokerCheck is not registered to sell you a DST interest.

How an offering is reviewed before it appears in a proposal

Every sponsor, property and offering we present has been through a review of six things: sponsor history, fee structure, tenant quality, lease terms, market strength and property-level financials. We reject offerings that do not meet our criteria for risk, performance or fee structure. We do not operate DSTs of our own, we do not steer clients into in-house products, and our team often invests in the same opportunities we recommend. Our why choose us page states the criteria and the post on how we review a DST explains each check and how to verify it against the offering's own documents using the due diligence checklist.

The review runs across a shelf of eight vetted national sponsors rather than a single relationship, which is what lets a proposal compare offerings instead of presenting one. A review reduces surprises; it does not remove risk. A DST interest is illiquid, there is no public market for it, distributions can be reduced or stopped, and the property can sell for less than it cost, so an investor can lose some or all of the principal invested. The risks that survive any review are set out in key DST risks and DST illiquidity and exits.

How a DST broker is paid

The selling commission is paid by the sponsor out of the offering proceeds. It is disclosed in the private placement memorandum, usually in a table that sets the selling commissions and dealer-manager compensation next to the sponsor's own acquisition, asset management and disposition fees, so you can see in one place how much of your subscription buys real estate. You do not pay the representative separately and the proposal carries no charge. Because the commission comes out of the amount you subscribe, the fee table is the first part of the memorandum to read; our pages on DST fees and loads and the offering load explain each line.

Compensation creates a conflict that disclosure manages rather than removes. The questions to put to any representative, including us, are in advisor fees and conflicts for DSTs: how many sponsors you work with, whether you or your firm has any interest in the sponsor, and whether a cheaper structure would do the same job. The form near the end of this page is the quickest way to ask them.

The proposal is the first step, and it starts with a conversation

Step 1 of our process is a call about your financial goals, tax exposure and investment preferences, whether you are selling one property or several, and whether we are the right fit. From that call we need five facts: the closing date or expected closing date, the loan balance that will be paid off, your adjusted basis, the state the property sits in and the state you live in, and the income you need from the replacement. The post on the questions we ask on a first call explains why each one matters.

The proposal that follows answers four questions in order: what is at stake if you do nothing, what has to be replaced, which structures fit, and which offerings are available now. It may combine a traditional DST with a cash out DST to cover a debt figure, or point to a direct title security where you want control of a single property. How to read each part, and what to hand your CPA, is in what a proposal contains. If you would rather see what we need from you first, find a DST for your exchange lists it, and our 1031 exchange advisor page explains how the advisory role differs from the brokerage one.

Questions sellers ask about DST brokers