In recent years, Delaware Statutory Trusts (DSTs) have become a popular investment vehicle for passive investors, offering hands-off management and tax-deferral benefits. The steady cash flow is another appealing feature, but the amount you receive as income doesn’t always match the gross revenue you’ll see in financial reports. This discrepancy stems from the fact that DSTs charge fees to cover an array of expenses. Knowing where these costs apply and how they affect your overall return is crucial for understanding the overall DST investment.
Below, Realized 1031 breaks down these DST fees to help you gain a clearer grasp and set expectations. Read on to learn more!
1. Upfront or Acquisition Fees
In this article, we’ll divide the DST fees into three categories. The first one is the fees you pay during the acquisition stage. These upfront expenses are associated with the identification, purchase, and structuring of the properties.
- Acquisition Fee: This is the payment that compensates the sponsor for identifying, evaluating, and acquiring the DST’s underlying properties. The amount typically ranges between 1-3% of the property’s purchase price.
- Offering and Placement Fees: These are the fees that cover the cost of legal structuring, securities compliance, and marketing that sponsors conduct to make the DST available to the market.
- Financing and Closing Costs: These include third-party costs, such as the following:
- Loan Origination Fees
- Appraisal Fees
- Title Insurance
- Due Diligence Expenses
- Organizational and Legal Fees: These costs come from the legal and accounting services required to draft the trust agreement, private placement memorandum (PPM), and other compliance documents.
You won’t need to write a separate check to pay for these fees. In most cases, these will be deducted from the capital you contribute, lowering the initial equity.
2. Ongoing Operational and Maintenance Fees
After the acquisition and closing of the offering, the DST is finally operational. As the DST sponsor or master tenant handles the daily operations and other aspects of the property, they will need funds, resulting in ongoing expenses throughout the DST’s holding period.
- Net Operating Expenses: Unless the DST enters a triple net lease agreement with the tenant, it will handle property taxes, insurance premiums, and maintenance costs.
- Asset Management Fees: The DST sponsor and its affiliates will also charge fees for asset oversight, including monitoring property performance, managing financial reporting, and ensuring compliance.
- Accounting Fees: These cover bookkeeping, investor reporting, tax document preparation (including annual K-1s), and compliance work.
- Property Management Fees: The DST will also need to pay property managers for their services, which include leasing, rent collection, and maintenance oversight.
These fees are directly deducted from the gross income of the DST. As such, the net operating income is lower than the gross income.
3. Disposition Fees
DSTs have a holding period that lasts from five to seven years or more. Once the full-cycle event is over, the DST sells the properties and distributes the proceeds to the beneficial interest owners. Property disposition has its own costs.
- Sales Fee: This covers the costs for the disposition services offered by the sponsor or an affiliate broker.
- Loan Repayment and Closing Costs: If the property’s financing must be paid off or refinanced before sale, prepayment penalties or defeasance costs may apply. These are deducted from the sale proceeds.
- Legal and Accounting Costs: Since a real estate sale is involved, legal and accounting services are necessary. The DST uses the proceeds to cover these costs.
Before the DST distributes the final proceeds, it will first deduct these disposition fees. None of these expenses is billed directly to beneficial interest owners.
Understanding the Indirect Payment Structure of DST Fees
DSTs are not allowed to directly bill any of the outlined fees to the investors. As such, these costs are absorbed within the DST’s cash flow or property transaction structure. As the underlying assets earn revenue, the DST takes away from the funds to cover operational expenses and other fees, and the remainder is the net revenue, which is then distributed to the beneficial interest holders.
This setup simplifies the investor’s experience. However, the structure makes transparency more important to ensure that you’re aware of where the rest of your supposed earnings are going.
Wrapping Up: What Fees Are You Paying in a DST?
DST fees can be classified into three broad categories: acquisition fees, operational fees, and disposition fees. Whatever the case, you’re not directly responsible for these payments. Instead, the DST covers these costs by taking from the gross revenue. Understanding each fee category helps investors evaluate whether a DST sponsor is charging reasonable rates relative to market norms and performance expectations.
Sources:
https://smartasset.com/investing/delaware-statutory-trusts-dsts
https://www.hellodata.ai/help-articles/acquisition-fee-real-estate
