DST Management Layers: Sponsor, Master Tenant, Asset Manager and Property Manager

The sponsor sits at the top of every layer, and the lender's own organizational chart shows it

Freddie Mac's Delaware Statutory Trust memo draws the structure as a parent company labelled sponsor and guarantor sitting above the trust, the master tenant and the property manager, with investors holding beneficial interests beside a sponsor-owned holding company. Its text says the trust is managed by a signatory trustee, which in turn is managed by the sponsor, and that the sponsor will typically have control over the master tenant and any property manager.

Filed REIT programs confirm it from the inside. In one Form 10-K, the DST manager is a wholly owned subsidiary of the operating partnership, which assigned its rights and fees to an affiliate of the REIT's advisor, and the master tenant is a subsidiary of the same operating partnership. A second program's Form S-11 says its advisor also serves as the manager for the DST program and its dealer manager sells it.

None of this is hidden; it is the reason the memorandum's conflicts section is long. Who the individual trustees are and what each may sign is at signatory trustee, Delaware trustee and sponsor; this page follows the money through the layers.

The trustee layer is deliberately thin, which pushes every operating decision down to an affiliate

In Rev. Rul. 2004-86 the trustee's activities are limited to the collection and distribution of income. The trustee may not renegotiate the loan, renegotiate the lease or sign new ones except on the tenant's bankruptcy or insolvency, make more than minor non-structural modifications, accept new contributions or reinvest proceeds. Delaware law, in 12 Del. C. chapter 38, lets trustees delegate management and requires at least one trustee with a Delaware address.

The lender memo describes the resulting roster: a signatory trustee that manages the trust's business affairs including loan payments and distributions, a Delaware trustee that maintains the Delaware address and keeps the trust alive if something happens to the signatory trustee, and an independent trustee that serves the lender if the signatory trustee fails to act. Because the signatory trustee is usually the sponsor or an affiliate, the layer that reports to investors is the one the sponsor controls.

Investors have no vote on operations, and the trust agreement sets out the few decisions they are consulted on; the list is at who controls a DST and what investors vote on.

The trust manager or asset manager earns an annual fee and usually a disposition fee, and holds the sale decision

The industrial program's 10-K describes a DST manager with primary responsibility for management, oversight and administrative actions in connection with the trust and the property, and the sole power to determine when it is appropriate for a trust to sell. Its affiliate receives an annual fee of 1.0 percent of the gross rents payable to the trust, reimbursement of expenses of establishing, maintaining and operating the trust and of selling the property, and up to 1.0 percent of gross equity proceeds for designing and overseeing the program.

The S-11 program prices the same layer differently: each trust may pay the manager a management fee equal to an agreed percentage of the trust's net asset value, plus a disposition fee of an agreed percentage of the gross sales price of any property sold to a third party, which the manager may reduce or waive, plus expense reimbursement. A fee on gross rents rises with rent; a fee on net asset value rises with appraised value; a fee on gross sales price is paid before investors see proceeds.

Which basis your trust uses is in the memorandum's compensation table, and the full stack of upfront and ongoing charges is reconciled at DST fees and loads. The disposition fee's place in the exit arithmetic is at the DST sale waterfall.

The master tenant and the property manager are the operating layer, and the master tenant's margin is the fee you do not see in the table

A REIT program's Form 10-K describes master leases of up to twenty years under which a subsidiary of the operating partnership subleases the property to occupying customers, bears all underlying operating costs and pays stated rent to the trust; the leases are triple-net, with the master tenant responsible for leasing costs, operating expenses, real estate taxes, assessments, utilities, insurance and repairs. The S-11 program's leases run up to ten years on the same pattern.

The master tenant hires the property manager, and the same 10-K says the sponsor's affiliates manage most properties for property management fees equal to a market-based percentage of gross revenues plus leasing fees at local market rates and reimbursement of on-site and off-site personnel costs. The OCC's commercial real estate lending handbook says examiners typically see management fees underwritten at 3 to 5 percent of effective gross income for office, retail and industrial property and 5 percent of revenues for multifamily, which is the benchmark to hold a DST's fee against.

The master tenant's own compensation is the gap between what the building earns and the rent it owes the trust. The 10-K says the net amount the REIT receives from the DST properties may be more or less than the amount it pays to investors and could fluctuate over time. How that spread is set and guaranteed is at DST master lease risk; trusts that skip the layer entirely are at direct-lease DSTs.

The selling layer is paid at closing, and it is also an affiliate

The 10-K describes a dealer manager agreement under which a sponsor subsidiary pays upfront selling commissions, dealer manager fees and organization and offering fees of up to 5.0, 1.0 and 1.25 percent of the gross purchase price per unit, plus ongoing fees of up to 0.25 percent of the equity investment per year on one class of interests; all of it is funded by investors at the time of investment or through deductions from distributions. The S-11 notes that because the dealer manager is an affiliate of the advisor, investors do not have the benefit of an independent third-party due diligence review of the offering that would exist if they were unaffiliated.

That is the layer a broker-dealer placing you into the trust is paid from, and the conflicts it creates on the advice side are at advisor fees and conflicts for DSTs.

Reporting lines all end at the sponsor, so the questions to ask are about independence and replacement

The S-11 states the limits plainly: compensation payable to the advisor and the dealer manager may not be on terms that would result from arm's-length negotiations, the advisor must allocate opportunities between the REIT and the DST program, and asset sales may allow the sponsor to earn disposition fees and commissions. The lender memo adds that the master tenant and property manager sign a four-party agreement with the lender and the trust, so even the lender cannot swap them without the documents allowing it.

Ask three things before you sign: which layers are affiliates and which are third parties, what each layer is paid and on what base, and under what conditions the trust or the lender can replace the master tenant or property manager. The answers belong on your DST offering due diligence checklist, and the reporting you should expect from the stack afterward is at DST reporting and transparency expectations.