A prominent goal for any real estate investor is to move away from active property management and achieve steady passive income. For high-earning accredited investors, the Delaware Statutory Trust (DST) can be a highly effective vehicle for bringing long-term stability to their portfolios, especially if they utilize a 1031 exchange to defer capital gains taxes.
However, a DST’s passive nature means purchasers have minimal control over how their capital is invested. Given the immense long-term commitment required to participate in DSTs, real estate investors must carefully consider both the assets and the property owners they are investing in. Having a meticulous selection process that includes thoughtful questions is imperative for anyone considering integrating DSTs into their portfolio.
The Importance of DST Due Diligence
DSTs are experiencing a 30% annual growth rate, making them an increasingly popular choice for real estate investors. It is important to understand that buying a DST implies an ownership interest in institutional-grade real estate — it isn’t just a financial product. While the opportunity to use a 1031 exchange in a DST is significant, they are largely illiquid. Investors typically have to hold them for five to 10 years, making due diligence an absolute necessity.
Potential investors are advised to take the time to evaluate the real estate in the trust and the sponsor managing it. This is imperative since they can’t decide when to sell the investment or fire the property owner if they are performing suboptimally. Asking attentive questions can help ensure that DST investors have a thorough understanding of the structure and whether or not it’s an asset they are willing to commit to. We’ve partnered with Sera Capital to bring you six essential questions to ask.
1. What Is the Sponsor’s Track Record?
Sponsors are in charge of acquiring, managing and eventually selling the property. Understanding their performance history provides valuable information on the trust’s potential. Intermediate investors should look past the marketing brochure and seek full-cycle data. Investors should know how many DSTs the sponsor has successfully sold.
2. What Are the Total Fees and Load?
DSTs often carry up-front loads, which can include selling commissions, organization costs and acquisition fees. Ask for a breakdown of every fee in the private placement memorandum. Assessing the net investment value is also key.
3. How Is the Debt Structured?
Most DSTs include nonrecourse debt, which allows investors to meet the “equal or greater debt” requirement of a 1031 exchange. Is the leverage appropriate for the asset class? A 60% LTV on a stabilized apartment complex is different from 60% on a hospitality asset.
4. What Is the Master Tenant Strategy?
In a DST, a master tenant lease is used to satisfy IRS requirements. If the DST is a single-tenant triple net lease (NNN) property, such as a Walgreens or a FedEx facility, the credit of that specific company is the primary security. Understanding the lease term is also highly important.
A property with only two years left on a lease is much harder to sell or refinance than one with 10 years remaining.
5. What Are the Exit Projections?
Every DST should have a clear business plan for the eventual sale. The first step to understanding exit projections is identifying if the sponsor has plans to renovate, effectively adding value, or is simply collecting rent.
It is also worth asking if the sponsor offers the ability to perform a 721 UPREIT exchange at the end of the term. This allows investors to trade their DST interest for shares in a larger Real Estate Investment Trust (REIT), offering even greater diversification and liquidity.
6. How Much Capital Is Held in the Property’s Reserve Fund?
Reserve funds are highly important in the world of DSTs. Due to the strict no capital call rule, sponsors or managers are legally not allowed to ask for more money once the investment is finalized. If a house needs a new roof, the installation fee should already be within the fund.
Understanding the reserve fund can help investors feel confident that their income is protected. If the reserve fund is too low, managers may withdraw money from the monthly income check if an expensive repair is required.
Sera Capital’s Consultative Approach
Choosing a DST is a life-altering decision for most investors, particularly those in their 60s and 70s who are looking to secure their family’s legacy. This is where Sera Capital distinguishes itself from commission-based brokers.
With a national reach and a fiduciary approach, Sera Capital prioritizes educational value over sales tactics. It operates with a “family helping families” ethos, providing a consultative environment where fees are transparent and the long-term goal is exit planning rather than just a one-time transaction.
Beyond standard Delaware Statutory Trusts for 1031 exchanges, its deep expertise extends to:
- 721 UPREIT exchanges for ultimate portfolio diversification.
- NNN property investments for steady, passive income.
- Qualified opportunity zone and structured installment sales for advanced tax deferral.
By taking a holistic view of a family’s real estate partnership, it ensures that the selected DST is a perfect fit for the client’s risk tolerance and income needs.
Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.
