Key Factors to Examine When Reviewing a Delaware Statutory Trust (DST) Investment

Investing in a Delaware Statutory Trust (DST) gives you the potential to invest in commercial real estate assets that otherwise might be out of reach. Through a DST, you acquire fractional shares in the trust. And the trust, in turn, acquires and manages real estate assets. Such an investment could mean regular cash flow and potential asset appreciation. 

But the DST is an investment. This means you must perform careful due diligence on the trust and what it’s offering to determine if it meets your particular investment goals. 

Here are some key factors when reviewing a Delaware Statutory Trust investment. 

Sponsors and track records. The DST’s sponsor is the entity responsible for bringing together real estate deals and investors. Because of the sponsor’s role, it’s important to research their background and previous experience to ensure their legitimacy and ability. Factors to consider as part of a sponsor evaluation should include: 

• History and track-record length 
• Asset management during various economic cycles 
• Asset expertise 
• Size and financial strength 

Private Placement Memorandum. Any trustworthy sponsor must issue a Private Placement Memorandum, or PPM. The PPM is a document offering disclosures and other information to help you make an educated decision about the DST investment. Sometimes known as the offering memorandum, the PPM includes information about the sponsor, terms of the offering, how proceeds will be used, and anticipated investment risks. 

Projected financials. As part of your due diligence, be sure to ask the sponsor about their anticipated return on investments, cash flow and other financials. Then go one step further and examine the market reports in which the asset is located to determine if the sponsor’s projections are reasonable and realistic. Another helpful tool is appraisals of similar assets in the targeted geographic area. This can give you an idea of how fast local real estate properties might appreciate in value.  

Geographic/market risks. In addition to examining other properties in your sponsor’s target market, also examine other potential geographic or market risk factors. These might include tenant demand, employment drivers, and population growth. These and other metrics can help you determine impacts on occupancy rates, rents, and appreciation. 

Additional fees and costs. You might already know how much you want to invest in a DST. But it’s a good idea to understand the extra costs involved with that DST investment as well. These can include acquisition and disposition costs and asset management fees. An analysis of these costs can help you determine their impact on potential returns. 

Hold plans and exit strategies. That DST is not going to own an asset or assets forever. Find out the hold period of that asset. Then ask about how the DST will dispose of the asset (like through a third-party sale or a 721 UPREIT exchange). Understanding the timeline is important, as it will let you know how long your funds will be tied up in that investment. The timeline also tells you when you can anticipate any returns involved. 

The takeaway here is that in-depth research is absolutely essential before you commit your funds to a Delaware Statutory Trust. Upfront information about a DST and its sponsor can help you determine if that targeted investment supports your financial and portfolio goals.