Broker Check

Benefits and Risks

Potential Advantages of Delaware Statutory Trusts

DSTs are attractive for the following reasons:

Management Free Ownership:

DST property eliminates the day-to-day hassles of property management, which allows free time to do the things that are more important to you. All the details of rent collection, leasing, maintenance, repairs and bookkeeping are handled by national class, professional property managers. The DST
real estate providers (Sponsors), who possess the special expertise in managing commercial real estate, perform the functions of overall asset manager and investor relations management.


Matching or Exceeding Your Loan Needs:

It is often difficult to find suitable replacement property that makes financial sense and meets the equity and debt requirements for your 1031exchange. DST property can potentially be matched to meet your debt and equity requirements and your individual investment needs. DST investors  potentially enjoy a monthly stream of income while not having to deal with day-to-day management duties any longer.


Minimum Investment Requirement:

DSTs allow the individual investor to purchase a portion of larger, institutional quality commercial property with minimum investments usually as low as $100,000.


Higher Quality Property:

Typical DST investment properties in the recent past have been valued between $25-125 million, which prices the average individual investor out of the market. The average investor can own a portion of institutional grade commercial property that is occupied by regional, national, and Fortune 500 credited companies. DST properties include apartment communities, grocery and retail anchored shopping centers, office and industrial complexes, and national and regional single tenant properties.



DST investments allow individual investors to take all or a portion of their exchange proceeds and invest them into one or more fractional interests in different property types, geographic markets, tax jurisdictions and with different real estate investment managers. Diversification potentially offers the investor additional portfolio stability and helps spread financial risk.


Higher Income and Growth Potential:

DST investors receive their percentage of the net cash flow, depreciation, and appreciation of the properties they purchase. Investors can anticipate potential monthly cash flow income that may be tax sheltered using depreciation. This cash flow is net of all property expenses, including loan, if  any. DSTs potentially offer similar tax benefits as conventional investment real estate only without the management burden. In many cases, investors can earn a higher cash flow and appreciation from DST ownership in a higher valued, quality property than they would in owning conventional  residential or small commercial investment real estate. Note all investments, including real estate, carry the risk of loss in addition to possibility of gain.


Pre-Arranged Non-Recourse Financing:

Loans, if any, are already in place and have been secured through institutional lenders by the real estate providers (Sponsors) at competitive terms. Typical loan terms secured for DST properties are at a low fixed rate, with non-recourse financing that range in term from 7-10 years and are  structured in accordance with the property business plan. For 1031 Exchange purposes, each DST investor assumes their percentage of the existing non-recourse loan, meaning the investors do not have any personal liability for the loan.


Readily Available Property:

There are a variety of real estate providers that have a steady and readily available inventory of DST properties. This makes DSTs a 1031 option for investors who need to identify replacement property within the 45-day identification period, need a backup property in case their primary property  falls through, or have equity left over in their exchange that needs to be placed. This solves the 1031 timing issue. Your money goes to work for you right away!


Defined Exit Strategy:

Each DST property typically has a holding period averaging between 5 -7 Years. The actual holding period may be shorter or longer. Investors benefit from some of the most experienced real estate investment companies that are dedicated to deliver results to their investors and have the  discipline to recommend selling when investment objectives have been met, thereby potentially increasing your overall return on investment.


Estate and Tax Planning Tool:

DST investments can be a viable 1031 exchange option to potentially assist in building wealth as well as to use them as a vehicle for estate planning purposes. By utilizing DST investments as 1031 exchange replacement property, the taxpayer not only is able to defer the capital gains tax on the  appreciation and depreciation recapture of their relinquished investment property, but upon their death and according to current tax law, their heirs receive a one-time step up in tax basis to the fair market value of their DST ownership. Therefore, the entire capital gain tax is wiped out. This can be an ideal solution for those who might otherwise opt to sell and pay capital gains tax in the 25-40% range. Note, in California, as of 2022, all real property transferred to heirs upon death will be reassessed at Fair Market Value for property tax payment purposes. The new tax bill can be very steep.

Potential Risks of Delaware Statutory Trusts:

As with any investment, 1031 exchanges and DST’s have certain risks:

No investment is 100 percent risk-free, and DSTs are no different. We’ve witnessed hundreds of client's experience relief, elation, excitement, and a dramatically improved lifestyle after they’ve exchanged their traditional investments for TICs or DSTs, but they do so with full awareness of the
potential risks. We would be doing you a disservice if we didn’t offer you a thoughtful and cogent analysis of the risk factors as well.

There are four main risks associated with DSTs: real estate risk, operator risk, interest rate risk, and liquidity risk.

At the end of this section, you will find a list of additional risks involved in DST investing. The Private Placement Memorandum for each investment will detail all risks specific to that offering that should be considered before investing. The most you can lose in a DST is the equity you used to purchase the investment. The loan on your property is non- recourse to you. 


Potential Real Estate Risk:

While it is regulated and sold as a security, at its core, DSTs are real estate, and the risks of any real estate investment apply. Real estate risk in this context is exactly equivalent to the real estate you presently own, including your own home. The local market can drop, the economy can decline, or
a tornado can cut a swath through the town. All of these events will affect the condition, income and expense, and eventual sales price of the property.

While no one has a crystal ball, there are ways to pro-actively mitigate these kinds of risks. Ensuring you have a well-diversified portfolio in markets that are growing is one way to potentially mitigate real estate risk. And don’t underestimate the importance of spending sufficient time at the outset to ensure the property is a good investment. Is it in the middle of tornado alley? Sitting on a fault line? Perched precariously on the coastline where hurricanes strike regularly? If the answer to any of these questions is “yes,” be certain that the property insurance protects against  such catastrophes.


Potential Operator Risk:

Poor management is another common risk in all real estate. When the property is not managed at an optimal level, return is always affected. Both a Property Manager and an Asset Manager manage DSTs, and each are assigned to different roles.

A quick review of how management duties are divided: the Property Manager’s job is to implement the business plan, increase income and lower expenses. As a result, net operating income is projected to increase over time. The Asset Manager watches the property as if he owned it himself,  managing the Property Manager with the same goal of increasing net operating income as much as possible, which increases your potential cash flow and appreciation potential. The Asset Manager also watches the market for sales opportunities and decides when it’s time to sell, reports to  investors periodically and is responsible for keeping the investors abreast of what’s going on with the property and answering any questions.

Operator risk spikes if the Property Manager or Asset Manager isn’t doing a good job, or—worst-case scenario—if there is fraud involved. But again, you do have some control over this potential risk. While you can’t account for the idiosyncrasies of human behavior, you can make a point of  only working with highly experienced Sponsors, ones with excellent track records and sterling reputations. Have candid conversations with the people who will be in charge of your investment, and determine for yourself whether they have the character and experience to make sound judgments in your best interest. 

We work hard to be certain that you have direct access to the Sponsors before you make an investment. We invite you to learn more about this industry by attending a one-day tour of three Sponsors in Southern California where we discuss many relevant topics and specific offerings  available. In addition, we host weekly webinars and conference calls with all of the Sponsors we work with to share their experience, performance, strategies and current offering details.


Potential Interest Rate Risk:

We do everything humanly possible to control real estate and operator risk through our due diligence. Interest rate risk is a little different. This type of risk varies, depending on the type of DST you select. It’s easiest to demonstrate in the retail space.
One of the attractive elements of triple net retail investments is having long-term leases in place with major tenants. Turnover is projected to be slight, and the corporation guarantees the lease payments. In such a long lease, the lease payments don’t increase very frequently, perhaps every five
years, and they only increase a small amount. The terms of your lease dictate yield and cash flow.
If your retail property has a 10-year lease with a yield of 5 percent, and five years from now all other comparable properties on the marketplace have leases in place that allow for a yield of 7 percent or 8 percent, you’ve lost potential income, and more than likely, your property will have a lower
value when you sell. The same long-term fixed lease that potentially gives you security and keeps the yield from shifting downward with the market also doesn’t allow the yield to shift upward. It’s entirely possible that you won’t keep up with inflation.

This risk is most often seen in retail and office properties, the ones that lend themselves to longer-term leases. One of the ways to control this risk is to invest in multifamily apartment DSTs or smaller retail units, because rents can be raised or lowered with the market. Of course, if the local marketplace doesn’t allow raising rents, you will remain at the same yield level and length of lease, but you have much more opportunity to make adjustments with shorter-term leases.


Potential Liquidity Risk:

DSTs are illiquid investments. They are no different than your 4-plex or 8-plex or strip mall. When you consider that you likely have held your current investment real estate for more than seven years, an anticipated hold period for DSTs of five to seven years on average doesn’t seem so long. The hold period could be shorter or longer, depending on market conditions. There is currently no secondary market for DST ownership shares. The industry has no “multiple listing service” as in traditional fee simple real estate ownership. It is possible to sell your shares back to the Sponsor or to another investor in your DST, however, it is likely the shares would sell at a discount, not a premium to the purchase price you originally paid. We inform our investors that this is a long-term investment, just like their relinquished property in their 1031 exchange.

Navigating real estate risk, operator risk, interest rate risk and liquidity risk can be tricky, but less so when you’re armed with the appropriate experience, education and training. It’s essential to have an experienced professional guide you through the process. With a proper understanding of  all the variables at play, these risks can be greatly reduced.

Additional Potential Risks…


DST investments may not be suitable for all investors.


Fees and Expenses:

There are fees associated with acquiring DSTs. Making the property available to multiple owners incurs expenses—including but not limited to brokerage fees, financing fees, commissions, legal fees, due diligence fees and marketing fees, for example. Offerings may incorporate ongoing  management or other fees and disposition fees. Investors should consider whether in some cases these fees might even outweigh the benefits of tax deferral. For each offering, investors should carefully review the section in the Private Placement Memorandum titled, “Estimated Use of Proceeds”, for a detailed understanding of fees.



Registered Investment Advisors have a fiduciary duty to act in the best interests of their clients. However, brokers are not required to abide by such fiduciary standard and do not have to place a client’s interests above their own.


Past Performance:

Past performance doesn’t ensure future performance. Property appreciation and projected income are not guaranteed. You may lose equity in this investment.


Tax Status:

According to the IRS and Revenue Ruling 2004-86, 1031 exchanges completed through a DST are structured investments. This revenue procedure includes guidelines for taxpayers preparing ruling requests. They are only guidelines, however, and are not intended for audit purposes. Also, laws  change, which means that different tax provisions may come into play, creating liabilities and penalties.


Potential for Property Value Loss

Just like when you were holding your own investment property, all real estate investments have the potential to lose value during the life the investment.


Potential for Foreclosure

All financed real estate investments have the potential for foreclosure.


Reduction or Elimination of Monthly Cash Flow Distributions

Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is a potential for suspension of cash flow distributions.

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