Seven Deadly Sins — Strategies for Mitigating Risks — Part 3

Mit­i­gat­ing risks is cru­cial for effec­tive­ly man­ag­ing Delaware Statu­to­ry Trust (DST) invest­ments. By employ­ing sound risk man­age­ment strate­gies, trustees, spon­sors, and ben­e­fi­cia­ries can safe­guard their inter­ests, main­tain trust integri­ty, and improve the like­li­hood of favor­able invest­ment out­comes.

May 30, 2024

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

The fol­low­ing is tak­en from a book writ­ten by the edi­tors of DSTNews.org co-authored a new book called DST WEALTH BUILDING. The Book is now avail­able at Ama­zon. The book is 470 pages and is a detailed guide on DSTs, §1031, §1033 and Oppor­tu­ni­ty Zones.  It was writ­ten for CPAs, Real Estate Pro­fes­sion­als and Accred­it­ed Investors. This was includ­ed in Chap­ter 12.

Here are key strate­gies for risk mit­i­ga­tion in DST invest­ments:

• Rig­or­ous Due Dili­gence: Thor­ough due dili­gence is vital for iden­ti­fy­ing poten­tial risks and assess­ing the suit­abil­i­ty of DST invest­ments. Before com­mit­ting cap­i­tal, investors should con­duct com­pre­hen­sive research on spon­sors, prop­er­ties, mar­ket con­di­tions, and reg­u­la­to­ry com­pli­ance. Review­ing finan­cial state­ments, prop­er­ty appraisals, lease agree­ments, and legal doc­u­men­ta­tion helps eval­u­ate invest­ment via­bil­i­ty and min­i­mize unfore­seen chal­lenges.
• Diver­si­fi­ca­tion: Diver­si­fi­ca­tion spreads invest­ments across var­i­ous assets, mar­kets, and class­es to reduce expo­sure to sin­gle points of fail­ure. By diver­si­fy­ing DST port­fo­lios, investors mit­i­gate the impact of adverse events on indi­vid­ual prop­er­ties or mar­kets, ensur­ing over­all sta­bil­i­ty and per­for­mance.
• Con­ser­v­a­tive Under­writ­ing Stan­dards: Adopt­ing con­ser­v­a­tive under­writ­ing stan­dards helps assess finan­cial via­bil­i­ty and risk pro­files. Stress tests, sen­si­tiv­i­ty analy­ses, and sce­nario plan­ning eval­u­ate poten­tial impacts of adverse con­di­tions on invest­ment per­for­mance, mit­i­gat­ing risks of over­lever­ag­ing, cash flow short­falls, and cap­i­tal loss­es.
• Active Asset Man­age­ment: Proac­tive mon­i­tor­ing and man­age­ment opti­mize per­for­mance, mit­i­gate risks, and enhance investor returns. Imple­ment­ing prop­er­ty improve­ment plans, opti­miz­ing leas­ing strate­gies, and prompt­ly address­ing main­te­nance issues max­i­mize prop­er­ty val­ue, min­i­mize vacan­cy rates, and mit­i­gate oper­a­tional risks.
• Com­pli­ance and Gov­er­nance: Ensur­ing com­pli­ance with reg­u­la­tions and main­tain­ing robust gov­er­nance struc­tures mit­i­gate legal and reg­u­la­to­ry risks. Adher­ing to laws, reg­u­la­tions, and report­ing require­ments avoids legal sanc­tions, reg­u­la­to­ry actions, and rep­u­ta­tion­al dam­age. Inter­nal con­trols, audits, and trans­par­ent com­mu­ni­ca­tion with investors enhance com­pli­ance and trust.
• Risk-Shar­ing Mech­a­nisms: Insur­ance cov­er­age, reserves, and con­tin­gency funds mit­i­gate finan­cial impacts of adverse events on DST invest­ments. Hedg­ing against poten­tial risks pro­tects cap­i­tal, pre­serves returns, and sus­tains invest­ment port­fo­lios, reduc­ing the risk of cat­a­stroph­ic loss­es.
• Con­tin­u­ous Mon­i­tor­ing and Eval­u­a­tion: Reg­u­lar­ly review­ing finan­cial reports, prop­er­ty per­for­mance met­rics, and mar­ket con­di­tions iden­ti­fies emerg­ing risks and oppor­tu­ni­ties. Vig­i­lance and proac­tive adjust­ment of invest­ment strate­gies help mit­i­gate risks and cap­i­tal­ize on mar­ket oppor­tu­ni­ties, align­ing with invest­ment objec­tives.

Mit­i­gat­ing risks in DST invest­ments neces­si­tates com­pre­hen­sive approach­es, includ­ing due dili­gence, diver­si­fi­ca­tion, con­ser­v­a­tive under­writ­ing, active man­age­ment, com­pli­ance, gov­er­nance, risk-shar­ing, and con­tin­u­ous mon­i­tor­ing. Imple­ment­ing these strate­gies enhances port­fo­lio resilience, pro­tects cap­i­tal, and achieves long-term invest­ment goals.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. 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, whether pub­lic or pri­vate, 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.

Thank you.