DST.EDU Series A‑Part 7: DST Cost of Acquisition

The devel­op­ment cost to bring any real estate prop­er­ty to the mar­ket con­tin­ues to increase. Delaware Statu­to­ry Trusts (DSTs) will incur many of the same costs but typ­i­cal­ly these costs are rolled up into a com­plet­ed prop­er­ty offer­ing.  

Updat­ed Post: Feb­ru­ary 6, 2024
Orig­i­nal Post Feb 13, 2022

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

There may be find­ers’ fees for locat­ing and nego­ti­at­ing prop­er­ties acquired by the spon­sor to be pack­aged as a DST. There may also be loan fees paid on the financ­ing if there is a debt com­po­nent on the DST acqui­si­tion. There may also be short term financ­ing (known as bridge financ­ing) enabling the spon­sor to acquire the prop­er­ty this bridge is paid off when funds are raised from indi­vid­ual investors. All costs are ref­er­enced (in the indus­try) as the “LOAD.”

What is a “load”? When an indi­vid­ual or investors pur­chase tra­di­tion­al real estate there are costs that are added to the pur­chase price (or includ­ed in the pur­chase price) to come up with the total cost. This cost may be title insur­ance, inspec­tion cost, fees for the loan that may be place on the prop­er­ty to pur­chase the prop­er­ty. Add to that poten­tial escrow for insur­ance, tax­es and oth­er costs do add addi­tion­al cost to the pur­chase. If you are buy­ing from a builder all of the cost of per­mit­ting, impact fees (if applic­a­ble), car­ry­ing cost as well as the soft and hard costs of con­struc­tion are wrapped into the pur­chase price. Many investors who reg­u­lar­ly pur­chase real estate sim­ply con­sid­er these cost up to the nor­mal course of acquir­ing a prop­er­ty. First time buy­ers of tra­di­tion­al real estate may be  sur­prised at the addi­tion­al out of pock­et costs that add to the deposit or cash need­ed to close.  Lenders on tra­di­tion­al real estate may lim­it the amount an investor may add to the pur­chase price (to finance cost). In tra­di­tion­al real estate we don’t typ­i­cal­ly call this a load but there is a peri­od of time investors need to hold the prop­er­ty in order to break even if the prop­er­ty is sold. Pri­or to the recent unprece­dent­ed increase in val­ues in real estate in some sec­tions of the coun­try the hold­ing peri­od as a rule of thumb was 5 years.  Besides recov­er­ing the cost of acqui­si­tion investors also need to account for the cost of sell­ing the prop­er­ty when the time comes.

DSTs also have addi­tion­al costs but are pack­aged a lit­tle dif­fer­ent­ly. One of the ben­e­fits for poten­tial investors in a DST is the full dis­clo­sure of the fees asso­ci­at­ed with the acqui­si­tion of the cost.  These are eas­i­ly review­able in the Pri­vate Place­ments Mem­o­ran­dum (PPM).  All investors must receive and review the PPM pri­or to invest­ing in a DST.

These cost as in addi­tion to the actu­al pur­chase price and clos­ing cost of the prop­er­ty.  There may also be inter­im financ­ing (bridge loan) enabling the spon­sor to acquire the prop­er­ty. This financ­ing will be retired or paid off once cap­i­tal is raised from indi­vid­ual investors.

There is a need for fund­ing or cap­i­tal to fund reserve accounts and oth­er fees asso­ci­at­ed with the ini­tial acqui­si­tion of the prop­er­ty that will be pack­aged as a DST.  There are legal fees for the struc­ture of the DST as well as fil­ing with the SEC. The DSTs are nor­mal­ly reg­is­tered as a Reg­u­la­tion D 506 (b) or 506 ©. These would be a non-exclu­sive safe har­bor under sec­tion 4 (a) (2) of the secu­ri­ties act. Because DST is a secu­ri­ty offer­ing only accred­it­ed investors may invest in. This would be reflect­ed in the PPM as Orga­ni­za­tion and Offer­ing Expens­es. There is a Mar­ket­ing Allowance to pro­vide sup­port mate­ri­als and cost involved with expos­ing the DSTs to the mar­ket (includ­ing Due Dili­gence mate­ri­als). There would be nor­mal com­mis­sions paid to a real estate bro­ker if involved with the acqui­si­tion of the prop­er­ty by the spon­sor of the DST offer­ing. There are upfront sell­ing com­mis­sions that are allo­cat­ed for the rep­re­sen­ta­tives who would secure the indi­vid­ual investors acquir­ing an inter­est in the DSTs.  (This was cov­ered in Part 6). All of these costs are con­sid­ered a “load”. 

Cov­er­ing your costs should be con­sid­ered so that you have all your cap­i­tal returned when the property/asset is sold at the end of the hold­ing peri­od. The more fees added to the acqui­si­tion price require a high­er sales price for the under­ly­ing assets owned by the indi­vid­ual investor. Investors should focus on not only a prof­it at the end of the terms but the preser­va­tion of the invest­ment cap­i­tal. Cap­i­tal preser­va­tion would need to include sell­ing for enough prof­it to cov­er the “load”. The DST spon­sor takes these into con­sid­er­a­tion when prepar­ing the DST under­ly­ing asset to be sold.   Own­ing real estate on your own also may require the hir­ing of a prop­er­ty man­ag­er who over sees the asset. Anoth­er ben­e­fit in the DST is the pas­sive nature of the invest­ment where the prop­er­ty is pro­fes­sion­al­ly man­aged. While this is not an acqui­si­tion cost it is con­sid­ered an oper­a­tional expense.

Look for Part 8: Lim­i­ta­tions of a DST

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.