“Sharpening Your Portfolio IQ: The New Semester of Alternative Investment Strategies” Part 2 ~ DST Drawback & Risks

We con­tin­ue with our edu­ca­tion­al series on most searched top­ics by investors regard­ing DST & §1031 exchange.  In Part One we briefly reviewed the How DSTs qual­i­fy as §1031 alter­na­tives and the Ben­e­fits.  In this sec­tion with have a frank review of the Draw­backs and Risks of the DSTs.

Sep­tem­ber 12, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ists & DST Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

These top­ics are the most searched top­ics by investors. Click here for Part One “Sharp­en­ing Your Port­fo­lio IQ: How DSTs Qual­i­fy as 1031 Alter­na­tive Invest­ment

Draw­backs and Risks

There are a vari­ety of ways to deter­mine whether or not an invest­ment deci­sion (or any deci­sion) is right for an indi­vid­ual investor. Once you iden­ti­fy poten­tial assets then comes the deci­sion-mak­ing process. There have been dif­fer­ent deci­sion-mak­ing options uti­lized by a vari­ety of peo­ple. The old Ben Franklin method of draw­ing 2 columns with the pros and cons. You can also eval­u­ate what the ben­e­fits of each. The pur­pose is to sim­pli­fy com­plex deci­sions and to visu­al­ize trade­offs clear­ly. We also have the abil­i­ty to encour­age ratio­nal rather than emo­tion­al deci­sions. There are invest­ment ana­lyt­ics that may assist in the process and poten­tial­ly the after-tax yield. (Many 1031 exchang­ers are seek­ing to defer cap­i­tal gains and to defer pay­ing cap­i­tal gains tax­es on a fed­er­al, and if applic­a­ble state and local basis). So, as with any type of invest­ment, Delaware Statu­to­ry Trust do car­ry a list of risks. And they’re not suit­able for all investors.

• First and fore­most, there would be a lack of con­trol, because these are pas­sive invest­ments.
• Investors do not have influ­ence over man­age­ment, leas­ing, financ­ing or sales deci­sions. That the trustee of the Delaware Statu­to­ry Trust will make.
• The oth­er risk that DSD’s have is that they are gen­er­al­ly con­sid­ered an illiq­uid asset. Cur­rent­ly there’s a very lim­it­ed to no resale mar­ket for DST.
• Typ­i­cal hold­ing peri­ods may be between 5 and 10 years. Like most real estate assets which are turnkey, there would be acqui­si­tion fees, dis­po­si­tion fees, as well as man­age­ment fees that would be incurred over the course of the hold­ing peri­od.
• There are also lim­i­ta­tions that are imposed by the Inter­nal Rev­enue Ser­vice. You may hear the words, “Sev­en Dead­ly Sins”. This includes no addi­tion­al cap­i­tal that can be raised once the DST has been closed. No refi­nanc­ing and there’s restric­tions on expen­di­tures. Then once the asset is sold, there are restric­tions on the rein­vest­ments deci­sions made by the spon­sor. All pro­ceeds need to go back to the investors. Rather than per­mit­ting the spon­sor to have con­trol over those pro­ceeds.
• When com­pared to oth­er illiq­uid invest­ments. Investors will find that there are sim­i­lar risks. In the Delaware statu­to­ry trust. Like oth­er types of alter­na­tive invest­ments there is lack of con­trol, investors can­not influ­ence man­age­ment, leas­ing, financ­ing, or sale deci­sions.

Invest­ment Mechan­ics & Due Dili­gence

There is a process for the acqui­si­tion of the DST and that may fall under the mechan­ics involved with the acqui­si­tions. In addi­tion, there are sev­er­al lev­els of due dili­gence. Due Dili­gence is typ­i­cal­ly per­formed by the spon­sor in the ini­tial acqui­si­tion and pack­ag­ing of the prop­er­ty as a DST. How­ev­er, addi­tion­al due dili­gence should be a key focal point of the finan­cial advi­sor or rep­re­sen­ta­tive who works with an indi­vid­ual investor. The due Dili­gence on the spon­sor includes review­ing their exper­tise and trans­paren­cy that the spon­sor has demon­strat­ed in the past. This goes beyond the sim­ple track record of the spon­sor and should include the meth­ods and types of com­mu­ni­ca­tions that the spon­sor has demon­strat­ed. This includes com­mu­ni­ca­tion com­plet­ed with cur­rent and past investors. Many spon­sors now uti­lize online por­tals to pro­vide infor­ma­tion to investors. This infor­ma­tion may include quar­ter­ly sta­tus reports and month­ly dis­tri­b­u­tion reports. An annu­al tax fil­ing reports investors will use when fil­ing their indi­vid­ual tax returns. Part of the oth­er due dili­gence and mechan­ics that the investors should be aware of would be the exit strat­e­gy as well as the dis­tri­b­u­tion sched­ule. As men­tioned before, DST’s are con­sid­ered an ill liq­uid invest­ment. But an exit strat­e­gy is typ­i­cal­ly pro­posed with­in the pri­vate place­ment mem­o­ran­dum. The exit strate­gies may include options for investors to sim­ply take a cash out dis­tri­b­u­tion. Oth­er exit options for investors may be to exe­cute in anoth­er 1031 exchange, which may or may not include an addi­tion­al DST. More recent­ly, there have been options for the investor to par­tic­i­pate in a sec­tion 721 UPREIT.  The core invest­ment goal would be to define what the investor needs in order to move into a Delaware statu­to­ry trust. If this is a direct cash invest­ment from an accred­it­ed investor, that investor may have the ben­e­fits of real estate invest­ments of an insti­tu­tion­al asset on a much small­er scale then typ­i­cal­ly may be avail­able to them. For a 1031 exchange investor, it may be to defer cap­i­tal gains and take a look at cre­at­ing an invest­ment port­fo­lio that may be acquired by the next gen­er­a­tion. How­ev­er, the under­ly­ing issue of the invest­ment mechan­ics and due dili­gence must be addressed.

Our core com­mit­ment to investors is to con­tin­ue our focus on attend­ing due dili­gence con­fer­ences that include third par­ty eval­u­a­tion of alter­na­tive invest­ment oppor­tu­ni­ties. In Part 3 we will review Typ­i­cal Returns and Invest­ment Min­i­mums as well as Estate Plan Strate­gies.  As always please con­tact us for a com­pli­men­ta­ry con­sul­ta­tion.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

Alter­na­tive invest­ments and DSTs are not for all investors.  The acqui­si­tion of a cer­tain alter­na­tive invest­ments includ­ing DSTs 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. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.