In short
The checks a DST passes before we show it: sponsor history, fees, tenant quality, lease terms, market strength and financials, and how conflicts are handled.
Before a Delaware Statutory Trust offering reaches you, it has been through our review of six things: sponsor history, fee structure, tenant quality, lease terms, market strength and property-level financials. We reject offerings that do not meet our criteria for risk, performance or fee structure, we do not operate our own DSTs, and we do not steer clients into in-house products. This post explains why a DST needs that kind of front-loaded review, what each check looks at, and how you can check our work against the offering’s own documents.
Why a DST has to be reviewed before you buy, not fixed after
A DST is a fixed arrangement. In Rev. Rul. 2004-86, the ruling that lets an exchanger treat a trust interest as real property for section 1031, “the trustee’s activities are limited to the collection and distribution of income.” The trustee may not accept additional contributions, may not renegotiate the loan, may not renegotiate the lease or enter new leases except on the tenant’s bankruptcy or insolvency, may not reinvest sale proceeds, and may make only minor non-structural modifications. The ruling’s holding that an interest in such a trust is an undivided fractional interest in the real property depends on those limits.
That means what is in place on the day the trust is formed, the property, the lease, the loan and the sponsor’s fees, is what you own until the property is sold. There is no landlord to fix a bad lease later. The review has to happen first. Our page on what you actually own in a DST explains the structure, and the seven restrictions on the trustee explains why they exist.
The six checks
Every sponsor, property and offering is scrutinized through our multi-layered process. The six areas we evaluate, from our why choose us page, are:
- Sponsor history. Who the sponsor is, what they have run before, and how prior programs were handled. Our guide on evaluating DST sponsors lists the questions.
- Fee structure. What the sponsor and the selling group are paid at acquisition, during the hold and at sale, as disclosed in the private placement memorandum. See DST fees and loads.
- Tenant quality. Who pays the rent and how reliably.
- Lease terms. Term, rent escalations, who bears taxes, insurance and repairs, and renewal options.
- Market strength. Where the property is and what supports demand there.
- Property-level financials. The property’s own income and expenses, not just the sponsor’s summary.
Our due diligence process focuses on strong, stabilized assets. The asset classes we recommend are essential-business triple net lease, self storage, multifamily housing, healthcare real estate, industrial and assisted living. By the time an offering reaches you, it has passed each of these filters.
What we reject, and the limits of any review
We reject offerings that do not meet our criteria for risk, performance or fee structure. Some DSTs we offer are off-market and available only through our network. A review does not remove risk. Distributions from a DST are never guaranteed; a tenant can default, a loan matures on its own schedule, interests are illiquid, and the property can sell for less than it cost. The risks that survive any review are set out in key DST risks and DST illiquidity and exits.
Conflicts: what the rule requires, and what we do
DST interests are securities sold under Regulation D, so a broker-dealer recommending one to a retail customer is subject to Regulation Best Interest, 17 CFR 240.15l-1. The rule requires the broker to “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker” ahead of the customer’s. It has four parts: a disclosure obligation covering fees, costs and conflicts; a care obligation, which requires reasonable diligence to understand the risks, rewards and costs of the recommendation and a reasonable basis that it fits the customer’s profile; a conflict of interest obligation, which requires written policies to identify and disclose or eliminate conflicts and to “eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time”; and a compliance obligation.
Our own practice on conflicts, from our live pages: we do not operate our own DSTs or steer clients into in-house products; to eliminate conflicts of interest we offer more than DSTs, including direct title and cash out structures; our team often invests in the same opportunities we recommend; and you work one-on-one with our leadership rather than a call center. The fee and conflict questions to ask any advisor are in advisor fees and conflicts for DSTs.
How to check our work
You do not have to take our review on trust. Three documents let you check it. The private placement memorandum describes the property, the lease, the loan, the fees and the risks; our guide on reading a DST PPM and Form D walks through it. The sponsor’s Form D is a public notice filed with the SEC within 15 days after the first sale in the offering (SEC, Rule 506(b)). And under Rule 506, a 506(c) offering must verify that every purchaser is an accredited investor, which for an individual means a net worth above $1,000,000 excluding the primary residence, or income above $200,000 in each of the two most recent years, $300,000 jointly, under 17 CFR 230.501(a). Step 2 of our process connects you directly with the sponsor’s managers, so you can ask them the same questions we did. Our offering due diligence checklist is the list we use.
What to do now
- Ask for the private placement memorandum of any offering you are considering and read the fee, lease and loan sections before anything else.
- Look up the sponsor’s Form D filings on the SEC’s EDGAR system and compare the offering size and dates with what you were told.
- Ask the sponsor the six questions above directly, and ask us how the offering scored on each.
- Request a proposal and tell us what you need the review to resolve.
We broker 1031 exchanges, are licensed in every state under a regulated broker-dealer framework, and have placed over a billion dollars with vetted national DST sponsors across more than twenty years.
