Rent Growth Assumptions in DST Underwriting

Rent growth reaches you twice, once through the master lease and once through the sale price

In a master-lease DST the trust receives a fixed base rent set in the lease's rent exhibit, as in a filed form of DST master lease. Growth in the property's own rents does not raise that number. It decides whether the master tenant can keep paying it, because the master tenant, as a 2025 Form 10-K of a REIT with a DST program puts it, bears the risk that the property's cash flow may be less than the master lease payments.

The second place is the exit. The projected sale price is the income in the sale year capitalized at an exit cap rate, so every year of assumed growth compounds into the value the projection says you will exchange out of. That interaction is examined at exit cap rate assumptions.

In a net-lease DST without a master lease, growth is contractual. Rev. Rul. 2004-86 describes a lease whose rent is fixed but may adjust by a formula based on a fixed rate or an objective index such as the Consumer Price Index, outside any party's control, and not contingent on the tenant's sales or profits. Read the escalator; that is the whole growth assumption.

Filed appraisal assumptions put market rent growth near 3 percent a year, varying by property type

Non-traded REITs that publish a net asset value disclose the inputs behind it. The 2025 Form 10-K of a diversified REIT with a DST program lists the weighted annual market rent growth rates its appraisals used at December 31, 2025, shown in the list below. A year earlier the same table showed 3.0 percent for the total portfolio, so the assumption barely moved.

These are appraisal inputs for a REIT's whole portfolio, not the pro forma of any DST offering. They are useful as a yardstick: if a DST's projection assumes materially faster growth than independent appraisers use for the same property type, ask the sponsor to explain the gap in writing.

The spread across types is narrow, from 2.6 percent for office to 3.2 percent for residential. Differences between offerings will come more from the market, the lease terms and the starting rent than from the property type label.

• Healthcare: 3.0 percent
• Industrial: 3.1 percent
• Office: 2.6 percent
• Residential: 3.2 percent
• Retail: 3.0 percent
• Total portfolio: 3.1 percent, over an average holding period of about ten years

Measured rents have not moved in a straight line, so a flat 3 percent hides the path

The Bureau of Labor Statistics index for rent of primary residence, a national measure of rents tenants pay, rose by these annual-average amounts: 3.8 percent in 2016 and 2017, 3.6 percent in 2018, 3.7 percent in 2019, 3.1 percent in 2020, 2.2 percent in 2021, 6.0 percent in 2022, 8.0 percent in 2023, 5.1 percent in 2024 and 3.5 percent in 2025. Over the ten years the index rose about 52 percent, roughly 4.3 percent a year compounded.

It is a residential, nationwide index of existing leases, so it says nothing directly about a single warehouse lease or one city's apartment market. Its use is as a reality check: a projection that assumes steady growth through a full cycle is assuming away years like 2021 on the low side. The OCC's Commercial Real Estate Lending handbook tells examiners that projected income should be supportable given the market and that rents used for valuation should come from arm's-length transactions so they are not inflated.

A small change in assumed growth moves the exit value more than it moves the yearly income

The diversified REIT's filing measures it: a 0.25 point decrease in the weighted annual market rent growth rate reduced the value of its real estate by 1.7 percent at December 31, 2025, and by 1.8 percent a year earlier. That is a whole portfolio in a discounted cash flow model; a single DST with one sale date is more exposed.

Hypothetical figures, rounded. A property earns $1,000,000 of net operating income today and the plan is to sell in ten years at a 5.5 percent cap rate. At 3 percent growth, income in year ten is about $1,344,000 and the sale value about $24.4 million. At 2 percent it is about $1,219,000 and $22.2 million. With no growth it is $1,000,000 and $18.2 million. One point of growth is worth more than $2 million of sale value before any change in the cap rate. Run your own numbers with your CPA using the offering's figures.

What to ask the sponsor about the growth line before you subscribe

Ask for the growth rate year by year, not as a single average, and for the source. Ask whether the first years assume rent increases on units or suites that have not been re-leased yet, which the OCC lists among the reasons a project's viability can be threatened when actual rents come in lower than projected. Ask for the distribution and sale value at zero growth.

Because the trustee cannot renegotiate the master lease or sign new leases except on a tenant's bankruptcy or insolvency, a growth shortfall cannot be fixed by restructuring. The pro forma lines are explained at how to read a DST pro forma, and independent checks of the sponsor's assumptions are at third-party DST due diligence reports.