The Delaware Statutory Trust (DST) market has grown in popularity over the last few years. According to a report by Robert A. Stanger & Co., the DST market raised $1.7 billion through February 2022, putting it on pace to be one of the largest years on record for DST offerings. There is no surprise that the DST market is heating up. As more and more deals become available, investors are looking for ways to defer their capital gains and benefit from the passive nature of DSTs. Although DSTs have been well received by investors as a replacement property option for 1031 exchanges, this type of investment should be more than a “plug-and-play” scenario. With the high velocity of deals and sometimes limited supply available in the market, performing the proper due diligence can help an investor ensure they aren’t exposing themselves to an unnecessary amount of risk.
In order to help you as an investor determine the good deals from the bad, Realized has provided a list of some of the questions you should consider before investing in a DST.
What Should You Know Before Investing?
Although DST offerings pass through several hands before making their way to investors, it is important to have a grasp on exactly what you’re entering into. Knowing and evaluating the details around a potential DST investment may keep you out of an unnecessarily risky offering. Here are some of the questions to ask when evaluating a DST offering:
- Who is the Sponsor and what is their track record? Has the Sponsor had experience with this type of investment? How has the Sponsor managed investments in different points of the real estate cycle? Although the internet is helpful in researching a Sponsor’s background, every offering memorandum includes the Sponsor’s prior performance. However, past performance does not guarantee future results.
- Are the projected financials reasonable? Returns are projected and based off a Sponsor’s own models and assumptions as to how a particular property will perform. These projections try to predict rent growth and occupancy levels, and there is typically no context to their underwriting. Referring to market reports and appraisals is a good first step in determining whether a deal’s financial projections are reasonable.
- What do the fees look like? Almost every Sponsor will take certain fees such as an acquisition fee, a disposition fee, and an asset management fee. Assess the competitiveness of these fees to determine if they will detract from your return.
- What is the intended exit strategy? As DSTs have gained popularity in the 1031 space, Sponsors have developed new ways to exit an investment. Sponsors utilize both third-party sales and UPREIT exit strategies. Assessing your long-term goals can help determine if the exit strategy aligns with your goals.
In addition to reviewing details about the specific DST investment, there are other factors to evaluate before making an investment decision.
- What are the geographic risk factors for this property’s location? It’s helpful to review the property’s surrounding metro to assess demand drivers and employment drivers as these ultimately drive long-term prospectus for a project. Additionally, investors should consider submarket trends including occupancy rates and median household income in the area.
- How might general market risks potentially affect performance? Another set of factors to consider are general market risks associated with real estate investments, such as the kind of appreciation an investor can expect. Additionally, how might current market debts affect the long-term prospects of the deal?
There are a lot of factors you should evaluate before making an investment decision. Reviewing the DST offering, as well as researching the area where the investment is located, are large parts of the DST due diligence process. With the added uncertainty surrounding inflation and rising interest rates, consulting a professional can help you better understand the risks associated with an investment and whether a DST offering is likely to meet your long-term goals and objectives.
Authored by Realized®.
Realized helps you exchange 1031-eligible investment properties for portfolios of commercial real estate that are customized to your shifting income needs, risk appetite, and investment goals across generations. By creating portfolios of fractional interests in Delaware Statutory Trusts (DSTs), Realized makes it easy to diversify investments across real estate sectors, geographies, and Sponsors.
Contact Realized to learn more about their due diligence and portfolio construction methodologies.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.