As you may already know, Delaware Statutory Trusts (DSTs) come in various configurations and arrangements. With a strategic approach, you can invest in multiple DSTs that provide additional benefits, such as heightened risk management. One strategy involves investing in both NNN DSTs and multi-tenant DSTs, offering steady income and enhanced diversification.
In this article, Realized 1031 shares the mechanisms and features that make this practice a powerful approach to creating a well-rounded portfolio. Let’s take a closer look.
Comparing NNN DSTs vs. Multi-Tenant DSTs
A triple net lease, or NNN DST, owns a property leased to one tenant under a triple net lease. In this arrangement, the tenant pays for the three net operating expenses: property taxes, insurance coverage, and maintenance costs. The DST merely waits for the rent and doesn’t need to handle day-to-day operational responsibilities. Typically, an NNN lease lasts for 10 to 20 years or more.
A multi-tenant DST is the most well-known structure for this type of investment. The DST owns one or several properties with several tenants.
However, unlike single-tenant NNN properties, where the tenant handles most operating expenses, multi-tenant DST properties typically have the sponsor or master tenant manage operations. Individual tenants may still be responsible for their pro-rated share of expenses, depending on lease terms. While there’s more operational complexity, multi-tenant DSTs can offer stronger growth potential, occupancy flexibility, and risk spreading across multiple lessees.
The Benefits of Pairing These DST Types
There are a few ways investing in both an NNN DST and a multi-tenant DST can benefit investors beyond the well-known advantages.
1. Balancing Passive and Active Risk
NNN properties provide passive income, but they also carry the risks associated with passive ownership. Meanwhile, multi-tenant DSTs have different operational dynamics, where the sponsor actively manages tenant relationships and property operations. For example, a multi-tenant DST introduces operational risk via the sponsor, but the ability to adjust rent or re-tenant spaces is more available compared to NNN DSTs. Together, the two balance out the risks the other one introduces.
2. Mixed Lease Durations
NNN leases usually last at least a decade. Multi-tenant DSTs, on the other hand, can have leases that last for a shorter period. Since there are multiple tenants, the leases can also expire at differing times. The structure allows for ladderized lease timelines, which not only provides stability but also reduces exposure to unfavorable market conditions since only a portion of the capital is at risk when any single lease expires
3. Access to More Asset Classes
Properties with single-tenant NNN leases typically house big-box retail or large healthcare companies—tenants who have the financial backing to handle the financial demands of the triple net lease. Meanwhile, multi-tenant DSTs may include a wider range of property types, including industrial, office, and mixed-use assets. This added variety enhances diversification and shields the DST from industry-specific downturns.
4. Managing Credit Exposure
Given how DSTs usually leverage financing to acquire properties, credit exposure remains a significant risk. When you pair NNN and multi-tenant DSTs, you can better manage credit exposure. Tenants with high credit ratings are usually the ones who enter NNN leases, which makes this arrangement more stable than others. Meanwhile, multi-tenant DSTs dilute credit risk since losing one tenant won’t automatically halt cash flow, which could happen in an NNN lease. As long as occupancy remains high, the DST remains resilient.
This combination helps investors mitigate both concentration risk (too much exposure to one tenant) and credit risk (default by that tenant).
In Conclusion: Why Pair NNN and Multi-Tenant DSTs?
NNN DSTs, while they offer stable income and long-term cash flow, carry a few risks associated with dependence on a single tenant. Pairing them with multi-tenant DSTs provides the balance and enhanced diversification needed to shield you from credit exposure, industry-specific market downturns, and other risks. Consider this strategy as you begin exploring DSTs for inclusion into your portfolio.
Sources:
https://www.investopedia.com/terms/c/credit-exposure.asp
https://www.forbes.com/sites/investor-hub/article/what-is-laddering-in-investing/
https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp
