Life Science and Lab Space DSTs

A lab building is worth its systems, and most of those systems are the real property you are buying

Laboratory space differs from office in what runs through the walls. Reg. section 1.1031(a)-3 lists wiring, plumbing systems, central air conditioning and heating systems, pipes and ducts, fire suppression systems and humidity control systems as structural components that are real property when they are integrated into the building. A lab's heavier air handling, exhaust and redundant power sit in those categories, and they are what you exchange into. Modular partition systems, by contrast, are held not to be real property in Example 8 of the same regulation, and bench equipment is personal property under section 1245.

The filed 10-K of the largest laboratory landlord describes its development and redevelopment projects as providing high-quality, generic and reusable laboratory space that meets the requirements of a wide range of tenants, and lists minimizing tenant improvement costs among its strategies. The distinction between generic infrastructure and one tenant's bespoke fit-out is the first thing to establish in a lab DST, because only the generic part survives a tenant's departure with its value intact.

A DST cannot add either kind later. The limits on improvements inside a trust, and why value-add strategies do not fit the structure, are explained at DSTs and value-add.

The tenant pays rent out of money it raised, not money it earned, which is the risk no lease clause removes

The same 10-K lists its tenants as multinational pharmaceutical companies, public and private biotechnology companies, product and service companies, academic and medical research institutions, government research agencies and non-profits. Its risk factors say what that means for rent: the inability of its tenants to obtain funding for research, development and other operations may adversely impact their ability to make rental payments; capital markets disruption could affect tenants' ability to continue operations, raise additional capital or access capital from venture capital investors; and a government shutdown could decrease funding of research and development.

The filing goes further on the market itself, warning that fewer early-stage private biotechnology companies may be formed and funded in the United States, which may reduce demand for the specialized laboratory space it provides. Investment-grade or publicly traded large cap tenants represented 53% of its annual rental revenue at December 31, 2025, which means close to half of a diversified lab landlord's rent came from tenants without those credentials.

In a single-tenant DST that proportion is either zero or one hundred. A trust with one private biotechnology tenant is a bet on that company's next financing round as much as on the building, which is why the comparison at single-tenant vs portfolio DSTs matters more here than in most classes.

Rev. Rul. 2004-86 means the trust cannot pay for the next tenant's build-out

Under Rev. Rul. 2004-86 the trustee may make only minor non-structural modifications to the property unless required by law, may not accept additional contributions of money, and may not renegotiate the lease or enter leases with other tenants except on the existing tenant's bankruptcy or insolvency. The lab landlord's filing describes what re-leasing costs: the terms of renewals or new leases, including the cost of any tenant improvements, concessions and lease commissions, may be less favorable than current terms. None of that spending is available to a trust.

The practical answers are the ones every operating-class DST relies on: a reserve funded at closing, a master tenant that carries re-leasing within its own margin, or a direct lease long enough that the trust is sold before it expires. Reserves and their limits are worked through at how a DST pays for repairs; the conversion that becomes necessary when the trust cannot act is described at the DST springing LLC.

Hypothetical: a lab building on a ten-year lease is placed in a trust with a seven-year projected hold and a seven-year loan. If the sale happens on schedule, the buyer prices three years of remaining term and the cost of re-leasing specialized space; if the sale slips, the trust approaches a lease expiry it cannot manage. Match the lease years to the loan years and the projected hold before you look at anything else.

Escalations, net structure and cluster concentration set the income profile

The filing gives the shape of lab income. About 97% of its leases carried annual rent escalations approximating 3%, either fixed or indexed to the CPI or another index; about 92% were triple net, requiring tenants to pay substantially all taxes, insurance, utilities, repairs and operating expenses in addition to base rent; leases in multi-tenant buildings typically had initial terms of 3 to 9 years and leases in single-tenant buildings 5 to 15 years. A lab DST's distribution therefore moves by the escalator and almost nothing else until the lease ends.

Geography concentrates the risk. The landlord's properties are primarily in Greater Boston, the San Francisco Bay Area, San Diego, Seattle, Maryland, the Research Triangle, New York City and Texas, and its filing warns that intensified competition may lead to oversupply of comparable space and pressure on rents and tenant incentives. A trust holding one lab building holds one submarket's supply cycle, a point developed at DST diversification levels.

Lab space is not medical office. Health-system tenants, clinical build-outs and lease lengths differ, and the planned page at medical office DSTs treats that class on its own.

Reading a lab DST offering: the questions that decide it

Pull these from the private placement memorandum and the lease abstract before you identify the trust.

• Remaining lease term against the loan maturity and the projected hold
• Whether the tenant is public or private, its last financing, and whether a parent guaranties the lease
• Which improvements are generic laboratory infrastructure and which were built for this tenant
• Who owns the bench equipment, and whether any of its value is inside the price you are paying
• The reserve at closing against a realistic re-tenanting cost for specialized space
• Sublease and assignment rights, since a shrinking tenant will use them
• Whether the trust is landlord directly or through a master tenant, and who guaranties the master lease; the general list is at the DST offering due diligence checklist