DST Share Classes: 1031 Exchange Investors, Cash Investors and Fee-Based Classes

Filed DST programs sell the same interest through different fee paths, and call some of those paths classes

One REIT's Form 10-K says its DST subsidiary pays the dealer manager upfront selling commissions, dealer manager fees and organization and offering fees of up to 5.0 percent, 1.0 percent and 1.25 percent of the gross purchase price per unit, and, for Class S DST interests, ongoing fees of up to 0.25 percent of the equity investment per year. All of these, it says, are funded by the private investors at the time of investment or through deductions from distributions paid to them.

Another REIT's 10-K describes a dealer manager fee of up to 1.5 percent and a commission of up to 5.0 percent of gross equity proceeds, plus, for certain classes of interests, ongoing fees of up to 1.0 percent of the equity investment or NAV per year, which the dealer manager may re-allow to selling broker-dealers. The class label tells you which of those streams applies to you.

Commission channels and advisor channels can carry different fees for the same offering, set in the pricing supplement

A 2024 placement agent agreement filed by a REIT shows how one DST is distributed through two kinds of participant: broker-dealers under soliciting dealer agreements and registered investment advisers under separate RIA agreements. The fees, expenses and reimbursements for each sale are set in the applicable pricing supplement, not in the memorandum's body, so ask for the supplement that applies to your channel.

In the same agreement the broker-dealer channel carries a selling commission of up to 5.00 percent and a dealer fee of up to 1.25 percent of the cash price, both re-allowed in full to the selling dealer, plus a 1.65 percent placement agent fee. If you buy through an adviser instead, compare the reduced upfront load with the advisory fee you pay separately over the hold; the conflicts on both sides are at advisor fees and conflicts for DSTs, and the full load table is at DST fees and loads.

Ongoing class fees come out of your distributions every year, so compare classes over the whole hold

An upfront load reduces the equity that reaches the property once. An ongoing class fee reduces cash flow every year you hold. Hypothetical: on a $500,000 interest, an ongoing fee of 0.25 percent a year costs $1,250 a year, or $8,750 over a seven-year hold, before any compounding; at 1.0 percent it is $5,000 a year. Compare that with the difference in upfront load between classes, and run your own numbers with your CPA.

Some programs cap the total. The placement agreement above pays distribution fees on the partnership units investors may later receive if the REIT exercises its purchase option, 0.85 percent a year of NAV for one unit class, and stops them once total selling and distribution fees for an account reach 8.75 percent of the purchase price. The class of units you would receive is chosen in your subscription agreement, so the choice you make at purchase follows you into the REIT; that path is at the DST to UPREIT 721 exchange.

None of these fees changes the risk of the real estate. Distributions are paid only from what the property earns after debt service, fees and reserves, and can be reduced or stopped; a class with a lower fee does not make the income more reliable.

Tax law prefers one class, so ask how the classes are structured and whether the tax opinion covers them

In Rev. Rul. 2004-86 the trust agreement provides that interests will be of a single class, representing undivided beneficial interests in the trust's assets. The regulation the ruling applies, Reg. section 301.7701-4(c), says an investment trust with multiple classes of ownership interests ordinarily is a business entity, but one with no power to vary the investment is still a trust if it is formed to facilitate direct investment in its assets and the multiple classes are incidental to that purpose.

A trust classified as a business entity with two or more owners is a partnership, and a partnership interest is not like-kind real estate. That is why the structure behind a class label matters: a fee paid by the investor or deducted from that investor's distributions is different from a class with different rights to the property's income or value. Read the memorandum's description of the classes and confirm the tax opinion addresses them; the qualification rules are at how a DST qualifies as like-kind property.

Exchange investors and cash investors own the same interest but start with different tax numbers and sometimes different minimums

A cash buyer and an exchanger in the same offering sign the same purchase agreement and hold the same undivided interest. The difference is on their own returns: the exchanger carries over the basis and holding period of the property sold, while the cash buyer starts with a cost basis. The consequences, including depreciation and the option to exchange out at sale, are at investing in a DST without a 1031.

Minimums can differ by investor type, and the public record will not show it. Form D Item 11 asks only for the minimum accepted from any outside investor, and where the minimum can be waived, the lowest amount below which no waiver is granted. Ask the sponsor for the minimum and the fee schedule that apply to your class, and see DST minimums and sizing for splitting an exchange.