The short answer
A net lease DST owns a building leased to one tenant who pays the rent plus the taxes, insurance and maintenance, so the trust's income is the lease and little else. That is the exact fact pattern of Rev. Rul. 2004-86, a 10-year net lease to a single tenant, which is why the class fits the DST rules more easily than any other. The risk is binary: while the tenant pays, the income follows the lease schedule; if it leaves or rejects the lease in bankruptcy, the income can fall to zero and the trust has few tools to replace it.
At a glance
| Ruling's own facts | Rev. Rul. 2004-86 describes a 10-year net lease to one tenant and quarterly distributions of cash less reserves |
|---|---|
| Trustee limit | No new lease or renegotiation unless the tenant is bankrupt or insolvent |
| Typical initial term | A filed net-lease REIT 10-K reports initial lease terms of 10 to 20 years in most cases |
| Rent increases | The same filing says most of its leases carry CPI-linked or fixed rent increases |
| Tenant pays | Utilities, real estate taxes, insurance, maintenance, repairs and capital expenditures under a triple-net lease |
| Bankruptcy claim cap | Lease damages limited to the greater of one year's rent or 15% of the remaining term, not over three years |
| Assume or reject | A bankrupt tenant has 120 days, extendable once by 90 days, to decide on a nonresidential lease |
The ruling that created the DST market was written around a net lease, which is why this class fits it best
In Rev. Rul. 2004-86 the owner buys Blackacre, takes a 10-year nonrecourse loan secured by it, and enters into a net lease with a single tenant, Z, for a term of 10 years, then contributes the property to the trust. The trustee must distribute all available cash less reserves quarterly. It may not renegotiate the loan or the lease, may not lease to anyone but Z except on Z's bankruptcy or insolvency, and may make only minor non-structural modifications.
A net lease asks almost nothing of the landlord, so those limits cost little while the tenant is in place. A filed net-lease REIT 10-K describes leases under which the tenant bears utilities, real estate taxes and assessments, property and liability insurance, maintenance, repairs and capital expenditures. Nothing on that list needs a trustee decision, which is why most of the trust's work is collecting rent and paying the lender.
The fit ends when the lease does. The same ruling that makes the structure workable is the reason the trust cannot sign a replacement tenant, a point developed at single-tenant vs portfolio DSTs.
The lease schedule is the income forecast, and the escalation clause decides whether it keeps pace with costs
The filed 10-K of a listed net-lease REIT reports that most of its leases provide for initial terms of 10 to 20 years, that the majority include rent increases tied to the Consumer Price Index or fixed increases, and that leases often give the tenant one or more multi-year renewal options on the same terms. It reported a weighted average remaining lease term of 10.2 years across 3,692 properties at December 31, 2025.
For a trust, read the escalation clause line by line. A fixed bump is known in advance; a CPI bump moves with an index you cannot predict. Because the trustee cannot renegotiate, whatever the lease says on day one is the rent path for the life of the trust, and renewal options belong to the tenant, not to you.
None of that is a promise of distributions. The sponsor's projections sit on top of rent, debt service and reserves, and any of those can change the amount paid to you; the questions to ask are on the DST offering due diligence checklist.
Tenant credit tells you whether rent gets paid during the term; bankruptcy law tells you what you recover if it does not
The same 10-K warns that a tenant bankruptcy could diminish or eliminate the income it receives, that a bankruptcy court might authorize a tenant to terminate its leases, and that a claim for unpaid future rent would be subject to statutory limits likely to leave the landlord with substantially less than the remaining rent owed. Those limits are in the Bankruptcy Code.
Under 11 U.S.C. 502(b)(6), a landlord's claim for damages from a terminated real property lease is capped at the rent reserved for the greater of one year or 15 percent of the remaining term, not to exceed three years, plus unpaid rent already due. Under 11 U.S.C. 365(d)(4), a bankrupt tenant has 120 days to assume or reject a nonresidential lease, which a court may extend once by 90 days and again only with the landlord's written consent.
So a long lease to a weak tenant is not a long income stream. In the trust, the bankruptcy is also the one event that unlocks the trustee's power to sign a new lease, but a replacement tenant, any downtime and any re-tenanting cost still have to be paid out of reserves the trust cannot top up. What happens to distributions in that case is covered at what happens if the sponsor or master tenant goes bankrupt.
Occupancy is binary: a single-tenant building is either fully leased or fully empty
The filed 10-K is direct about vacancy: when a single-tenant building goes dark, the landlord becomes responsible for all of its operating costs, may not be able to re-lease at a comparable rate, and the property's value can fall. A REIT with thousands of buildings absorbs that. A trust with one building cannot.
The cliff usually arrives at lease expiry, not mid-term. If the remaining term is shorter than the loan, or the tenant's renewal option falls inside your planned hold, the trust's exit value depends on a decision you do not control. Check the renewal option dates against the loan maturity and the sponsor's stated hold period before you subscribe.
Line of trade matters as much as credit. The same REIT reports its largest concentrations in automotive service, convenience stores and restaurants, and lists environmental risk for uses such as fuel storage and auto service. A trust holding one such building carries that use's specific risks in full, including the environmental questions at DST environmental and insurance risk.
Zero cash flow trusts are net lease DSTs where the lender, not the investor, receives the rent
The long, fixed rent of a credit tenant is what makes very high leverage possible. In a zero cash flow structure the trust borrows heavily against the lease, all rent goes to debt service and loan amortization, and investors receive no current distributions. The client's cash out DST is built this way around triple-net properties with long leases to investment-grade tenants and nonrecourse debt.
The point is debt replacement and liquidity in the exchange, not income, and the tax income still flows through each year without cash to pay it. The arithmetic and the risks are at zero cash flow DSTs explained; the vacancy cliff above applies with more force, because a high loan balance leaves little room if the tenant leaves.
For the broader case for owning net-leased real estate, see the triple net overview.
Related questions
Why are so many DSTs net lease properties?
Because the IRS ruling that approved the DST structure used a single-tenant net lease as its example, and a tenant who pays taxes, insurance and repairs leaves the trustee nothing to decide. That keeps the trust inside the ruling's limits with little effort.
Can the trustee extend the lease early to avoid the vacancy cliff?
No. Rev. Rul. 2004-86 bars the trustee from renegotiating the lease or leasing to anyone else unless the tenant is bankrupt or insolvent. The tenant can exercise its own renewal option, but the trust cannot negotiate one.
Does an investment-grade tenant remove the risk?
It lowers the chance of default during the term but says nothing about renewal or value at expiry. A filed net-lease REIT notes that tenants may default or decline to renew and that vacant buildings may not re-lease at comparable rents.
What do I get if the tenant rejects the lease in bankruptcy?
A capped claim. The Bankruptcy Code limits lease damages to the greater of one year's rent or 15% of the remaining term, not over three years, plus unpaid rent due, and that claim is often paid at a discount.
Who pays the roof and parking lot repairs in a net lease DST?
Under a triple-net lease as a filed net-lease REIT describes it, the tenant does, along with taxes, insurance and capital expenditures. If a lease leaves any item with the landlord, the trust pays it from reserves it cannot replenish, so read the lease abstract in the offering documents.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.