DST Interest Pricing and NAV: How Interests Are Priced at Purchase and Valued Afterwards

The offering price is the property value plus the cost of raising the money, fixed before you see the offering

A REIT that runs a DST program states in its Form 10-K that the fees of its advisor and dealer manager are substantially funded by the investors through purchase price mark-ups of the initial estimated fair value of the properties, fees paid at the time of investment, or deductions from distributions. Another REIT's registration statement says its DST properties are valued before the offering begins for the purpose of determining the price of the beneficial interests.

The load is spelled out in the placement documents. A 2024 placement agent agreement pays a selling commission of up to 5.00 percent, a dealer fee of up to 1.25 percent and a placement agent fee of 1.65 percent of the cash purchase price; another REIT's 10-K lists up to 5.0 percent, 1.0 percent and 1.25 percent for commissions, dealer manager fees and organization and offering costs. Acquisition fees, financing costs and reserves can sit on top, and are itemized at DST fees and loads.

You pay the price in two parts. A filed purchase agreement prices each 1 percent interest as a stated cash amount plus 1 percent of the trust's loan, and says the price includes the compensation and fees payable to the trust and its affiliates. So every buyer in the offering pays the same price per percentage point, and the loads are inside it.

On day one the interest is worth less than you paid, because the loads bought nothing you can sell

FINRA's approach to statement values for unlisted direct participation programs and REITs, approved by the SEC in an October 2014 order, captures this. Its net investment methodology starts from the amount available for investment after sales commissions, dealer manager fees and organization and offering expenses, rather than the price paid. A firm may use it until 150 days after the second anniversary of breaking escrow.

Hypothetical: you pay $100,000 in cash in an offering whose commissions, dealer and placement fees total 7.9 percent of the cash price, the sum of the maximums in the filed placement agreement above. Roughly $92,100 of your cash is left for the property and its reserves before any other load. If the sponsor also marked up the property price, the real estate behind your interest is smaller still. Run your own numbers from the memorandum's use-of-proceeds table with your CPA.

The same order requires statements that carry these values to say that the security is not listed, is generally illiquid and that any sale may be at less than the value shown. Treat the number accordingly; the exit routes are at DST illiquidity and exits.

After closing, value is an appraisal of the building less the debt, so the loan magnifies every change

FINRA's appraised value methodology, described in the same order, uses valuations of the program's assets and liabilities performed at least annually, by or with the material help of a third-party valuation expert, using standard industry methods. A 2021 notice confirms both methodologies remain in Rule 2231(c). Ask your sponsor which method its statement value uses and the date of the last appraisal.

A filed option agreement between a DST and a REIT shows the arithmetic used when value has to be paid in cash or units: the property's appraised fair market value, plus any money left in the trust's reserve account, less the remaining loan principal and any accrued unpaid expenses or liabilities, multiplied by each investor's percentage. That is a net asset value per interest.

Hypothetical: a trust's building is appraised at $20 million with a $10 million loan, so equity is $10 million. A 10 percent fall in the building's value to $18 million cuts equity to $8 million, a 20 percent fall for every investor. Leverage works the same way upward. Rising interest rates can lift cap rates and lower values without any change at the property, as the OCC notes in its commercial real estate handbook.

The only real price test comes at sale or when a sponsor buys the interests at an appraised value

In the filed option agreement the property's value is set by an independent third-party appraiser chosen by the buyer and obtained within six months of exercise. The trustee may commission its own appraisal within 30 days; if that one is higher by 5 percent or more, the two are averaged. The value ignores the master lease and takes no discount for lack of liquidity or minority interest. One REIT's registration statement likewise values its DST properties without regard to the master lease and the purchase option.

On a sale to a third party the price is whatever a buyer pays, and what reaches you depends on the loan payoff, costs and fees, set out at what happens to the money when a DST sells. Until one of those events happens, every value you see is an estimate.

Executors need a fair market value at death, which is a different question from the statement value

For estate tax, Reg. section 20.2031-1(b) values property at its fair market value at the date of death, defined as the price at which it would change hands between a willing buyer and a willing seller, neither under compulsion and both with reasonable knowledge of the relevant facts. Because you are treated for tax purposes as owning an undivided interest in the real estate under Rev. Rul. 2004-86, the executor's appraiser starts from the property and the trust's debt, then decides whether a buyer of an illiquid, non-controlling interest would pay less.

Ask the sponsor for the latest property appraisal, the loan balance and the reserve balance as of the date of death, and give them to the estate's appraiser and CPA. The planning side is at DSTs in estate planning and the mechanics of moving the interest at transferring DST interests to heirs and trusts.