Third-Party DST Due Diligence Reports: Who Writes Them and How to Use Them

Property reports describe the building, and you can ask for them before you close

A DST purchase agreement filed as an exhibit to a REIT's Form 10-Q tells approved investors that, on request, the sponsor will send the loan documents, third-party reports (appraisals, property condition assessments and Phase I environmental site assessments), title policies and surveys, and the trust agreement. These are written by appraisers, engineers and environmental consultants retained for the acquisition and the lender, not for you, but they are the closest thing to an independent look at the asset.

The environmental report follows a federal standard. EPA's all appropriate inquiries rule recognizes ASTM E1527-21 for Phase I assessments under 40 CFR 312.11, and 40 CFR 312.20 requires the inquiry within one year before acquisition, with certain components updated within 180 days. Check the report date against the trust's purchase date, and read the findings and recommendations, not just the conclusion. Environmental and insurance exposure is covered at DST environmental and insurance risk.

For the appraisal, compare the value with the price the trust paid and the price built into your interest; a sponsor mark-up shows up as the gap. The OCC's commercial real estate handbook explains the income approach appraisers use, so you can see which cap rate and NOI produced the number.

Offering reviews are written for the broker-dealers who sell the DST, and FINRA tells them how much to rely on one

FINRA's Regulatory Notice 23-08 says members often rely on information from a third party hired by the member or the issuer, and that appraisers, attorneys and due diligence experts can provide valuable help. It adds that the member should review that information with reasonable care, considering the independence, incentives and qualifications of the third party, particularly when the issuer hired it. Where a report has inconsistencies or does not address a concern, the member should get a fuller explanation or research the issue itself.

Regulatory Notice 10-22 sets the same limit from the other side: a firm may retain counsel or experts, must review their qualifications and competence, must address any gaps in their work, and the use of experts does not necessarily complete its investigation. A firm that is merely in the selling group may rely on a syndicate manager's investigation only if it has reason to believe the manager was expert, conflict-free and actually did the work.

A REIT whose affiliated dealer manager also sells its DST program puts the investor's stake plainly in its registration statement: the dealer manager will not make an independent due diligence review of the kind an unaffiliated underwriter would, so if your broker-dealer does not, you do not have the benefit of one. The same logic applies to any affiliated distribution.

Follow the money: in the filed documents, due diligence is paid for out of the offering, which is why independence matters

A 2024 placement agent agreement for a DST pays selling dealers a dealer fee of up to 1.25 percent of the cash purchase price for coordinating marketing and for non-itemized, non-invoiced due diligence efforts. Those fees are part of the price investors pay, so investors fund the diligence even though it is done for the selling firms.

That is not a reason to ignore a report; it is a reason to ask who engaged the writer, who paid, and whether the writer has reviewed the same sponsor's earlier offerings. FINRA's focus on issuer-hired third parties is a prompt to ask the same question. The broader sponsor review is at how to evaluate DST sponsors.

Use a report as a list of questions, not as an answer

FINRA cites an enforcement action against a member that relied on a third-party diligence report containing no independent assessment or substantive analysis of the issuer. A report that restates the memorandum adds nothing. Ask your representative what their firm's own review changed or added, and pair the answers with the DST offering due-diligence checklist and judging a DST sponsor's financial strength.

No report removes the risks of the investment. A favorable review is an opinion as of a date about a private, illiquid security whose income can fall or stop.

• Date and scope: when was it written, and does it cover this offering's final loan terms and price?
• Re-underwriting: did the writer rebuild the pro forma, or summarize the sponsor's? See how to read a DST pro forma.
• Sponsor history: did it compare prior programs' projected and actual results, including weak ones? FINRA warns against cherry-picked past performance.
• Related-party payments: does it list every fee to the sponsor and affiliates and the conflicts they create?
• Red flags and responses: what did it flag, and how did the sponsor and the selling firm resolve each item?
• Property reports: do the appraisal, condition and environmental findings match what the memorandum says?