Any investment utilizing Real Estate as the underlying asset has risk. Delaware Statutory Trusts utilize real estate so have the same inherent risks as traditional real estate.
By Al DiNicola, AIF®, CEPA™
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC
Updated Post: January 15, 2024
Original Post Feb 5, 2022
Welcome DST News! Our goal is to provide non-biased education and market information for Accredited Investors on DSTs. We hope to provide a Depth & Breath of knowledge for Investors About Delaware Statutory Trusts (DSTs)
The real estate drives the investment’s performance. Terms like illiquidity, economic risks, vacancy risk, rising interest rate risks and COVID related cause and effects, all add to the risk. These factors often increase the risk profile of real estate investments. Investors also have a risk profile based on their understanding of the investment risk as well as the financial capacity each investor has at any given time.
DSTs are for accredited investors only. Investors qualify as “Accredited” by income or net worth. Individual earning $200,000 per year or couples earning $300,000 per year is the income method of qualifications. If the investor’s net worth is $1M (excluding primary residence) that would be the net income qualifier. This is an either-or qualification.
There are regulations surrounding DSTs that are not present in direct investment in real estate. DSTs are created by a sponsor. There is risk in acquiring the property (asset) and risk in setting up the offering. The sponsor incurs the risk during the entire structuring on the offering, developing documents for sale to eventual accredited investors. There are other sponsor risk during the acquisition process and ultimately closing on the asset that will be the DST. All the costs incurred by the sponsor will be recovered when investors acquire their individual interest.
All the cost are disclosed in the offering documents called the Private Placement Memorandum (PPM). There is also a fee structure that is different from traditional direct real estate or even REIT investments. There are additional regulatory requirements of DSTs because of the execution risk. There are fees associated with DST offerings that may affect the overall performance.
At first glance some point to the commission schedule that are disclosed in the PPM. For example, there may be a 5% to 6% commission paid to brokers / dealers. This may be compared to a seller of traditional real estate listing but the seller notifying a real estate agent that they will sell their property but to get the real estate commission from the buyer. There is a noticeable difference in the DST structure. Commissions are paid only on the equity that an investor pays for the property and not any financing that may be arranged. Think about that for a moment. When you purchase traditional real estate commissions are paid on borrowed funds. That adds to the potential cost upon exit. Typically, the rationale for taking on debt is to utilize leverage. Taking a deeper dive into other risk with DSTs are worth spending time, especially with regards to the impact on your investment. We will cover additional risk in future installments (such as the load, seven deadly sins, and other risks). For more information, please visit https://dstnews.org/
Watch for Series A Part 4: The Economic Focus.
DST’s (Delaware Statutory Trusts) are for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com. This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, in any form, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor.
NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
