DST.EDU Series A Part 3: What are the Risks Associated with a Delaware Statutory Trust?

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.