When going into a Delaware Statutory Trust (DST) investment, your DST Sponsor is just as important to your success as the property. What seems like a great property in a top location managed by an inadequate Sponsor could mean potential risk in your DST investment.
Before handing over the reins, investors need to do some homework on their prospective sponsors and their track records.
Sponsor Track Records
The Sponsor’s track record gives investors information on all properties that have been managed by that Sponsor, including performance and cash flow. Although a positive track record doesn’t guarantee success, a track record with a history of success is better than one with a long list of failures.
Below are some factors to consider when evaluating a Sponsor’s track record and potential risk:
- Length of track record: A longer history gives better insight into the track record of a Sponsor. This is not to say that those relatively new to the field are not competent to handle investments, but it does require some more research.
- Economic cycles: How a Sponsor manages investments during a recession is more telling than how it performs when markets are up.
- Asset class: Whether you’re purchasing an apartment building, a hotel, an office building, or a triple net lease agreement, your Sponsor should have proven success with the same type of asset you are considering.
- Size and financial strength: Sponsors with experienced teams and larger operations tend to be better equipped to locate, analyze, and manage their properties. Larger Sponsors also tend to benefit from economies of scale, which can reduce costs for investors. More business with bigger Sponsors could also lead to better pricing and loan terms.
Here are some questions to think about when assessing Sponsor track record and risk level in a DST entity:
- Does the Sponsor have expertise in the type of asset you’re considering purchasing?
- How much did the Sponsor pay for the property? How does this price compare to other properties in the area?
- How do the Sponsor’s fees compare to others? Are fees and expenses capped?
- Are there conflicts of interest? Does the master lease align with both the investor and the Sponsor?
- On recently purchased property, are there any sudden markups?
For investors entering the market, DST due diligence is essential to diminish exposure to potential risk. Investors can safely assess all prospects to determine all benefits, liabilities, and risks when looking to invest in a DST entity.
Many DST Sponsors sell through independent broker-dealers who perform due diligence on both the Sponsor and property. These third-party broker-dealers gain nothing by promoting a particular Sponsor or property and can offer unbiased judgment. Investors can choose their Sponsor based on information that they know is reliable and accurate.
When reviewing a Sponsor, the third party examines:
- History and track record
- Knowledge of the local market
- Team experience
- Fees and markups
Your DST Sponsor Matters
Prior to investing in a DST, you should carefully review and evaluate your Sponsor before exposing yourself to unnecessary risk. A subpar Sponsor could mean higher levels of risk and potentially lower returns on your investment. A Sponsor’s past experience doesn’t guarantee potential returns, cash flow, or appreciation on your investment property. Consult with your financial advisor about Sponsor risk and its role in DST entities before choosing your investment property.
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