How to Review a Private Placement Memorandum (PPM) for a Delaware Statutory Trust (DST) Offering ‑Part 2

In part 1 How to Review a Pri­vate Place­ment Mem­o­ran­dum (PPM) for a Delaware Statu­to­ry Trust we opened up the dis­cus­sion. We cov­ered the role of the PPM in DST Invest­ing as well as Com­pli­ance and Investor pro­tec­tion.  We con­tin­ue with Part 2 which includes review­ing Spon­sor and Man­age­ment, the Asset or Prop­er­ty and a few oth­er dis­clo­sures.

Octo­ber 6, 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

Part Three will focus on the Use of Funds.  How to Review a Pri­vate Place­ment Mem­o­ran­dum (PPM) ~ Part 1

Under­stand­ing the scope of a pri­vate place­ment mem­o­ran­dum (PPM) con­tin­ues to be a request­ed top­ic. Many PPMs are over 150 pages long and some may reach 300 pages (or more) espe­cial­ly if the DST offer­ing is com­prised of sev­er­al offer­ings in a port­fo­lio.  We have reviewed near­ly 700 Offer­ings over the past num­ber of years.

Spon­sor and Man­age­ment Team

The sponsor’s exper­tise and track record often deter­mine DST per­for­mance. Since 2004 when DST were first acknowl­edged by the IRS as a per­mit­ted replace­ment for a §1031 exchange there have been many spon­sors who have entered the space. Some of the spon­sors were large real estate com­pa­nies with a long-track record of invest­ment expe­ri­ence. DSTs may be the same type of real estate offer­ing with a dif­fer­ent “wrap­per” accord­ing to some opin­ions. Mean­ing rather than a Ten­ant in Com­mon (TIC) or REIT, the invest­ment was struc­tured to be offer to a poten­tial­ly expand­ed investor pool (those investors exe­cut­ing a §1031 exchange).  As a DST spon­sor the longest track record may be 22 years. Inland Real Estate was one of the first DST spon­sors. Inland was the com­pa­ny who peti­tioned the IRS to use DSTs in a §1031 exchange. Like oth­er spon­sors, Inland was an estab­lished real estate invest­ment com­pa­ny expand­ing their offer­ings.  Quick­ly the adop­tion of the DST offer­ings became sought after and there were many more spon­sors.  Some with exten­sive track records and oth­ers with lim­it­ed track records.  Recent­ly very large REITs (Real Estate Invest­ment Trusts) are now offer­ing DSTs.  Imag­ine, a $25 Bil­lion REIT is now offer­ing a $50M DST. The strat­e­gy the REITs pro­vide is for the DST to be moved back into the REIT after a safe har­bor peri­od (2 years). This may pro­vide a large diver­si­fi­ca­tion pool of assets.

What to Review:

There are a num­ber of items to research regard­ing the spon­sor.  The spon­sor his­to­ry pri­or to the DST offer­ings is one area to review.  As stat­ed pre­vi­ous­ly there may be an expe­ri­enced real estate invest­ment firm who enters the DST spon­sor role as a “new spon­sor”, but not new com­pa­ny.  There are also indi­vid­ual spon­sor prin­ci­pals with expe­ri­ence from oth­er firms who estab­lish a new com­pa­ny and rely on busi­ness skills sets they bring to the new com­pa­ny. The suc­cess of pre­vi­ous pro­grams should be not­ed with regards to real­ized returns and exit per­for­mance. The PPM should note the suc­cess­ful pro­grams as well as mar­gin­al or unsuc­cess­ful pro­grams. PPMs will also dis­close any pend­ing or for­mer lit­i­ga­tion that involves any of the prin­ci­pals (known as “bad actors”).  The key ele­ments of con­cern accord­ing to a third-par­ty eval­u­a­tion com­pa­ny may be… First this sec­tion attempts to ascer­tain the like­li­hood that an organization’s offi­cers or key employ­ees may com­mit fraud­u­lent or risky activ­i­ty and to iden­ti­fy whether the man­ner in which an orga­ni­za­tion con­ducts its busi­ness activ­i­ties may posi­tion the orga­ni­za­tion for cost­ly lit­i­ga­tion. Sec­ond, this sec­tion attempts to iden­ti­fy dis­qual­i­fy­ing “bad actor” events under 17 C.F.R. §230.506(d) of issuers, affil­i­at­ed issuers, and indi­vid­u­als. This review does not include reg­is­tered rep­re­sen­ta­tives or sell­ing group mem­bers. Third, this sec­tion attempts to iden­ti­fy areas of lit­i­ga­tion-relat­ed con­tin­gent lia­bil­i­ties that may affect the organization’s finan­cial posi­tion. When we meet with spon­sors and third-par­ty due dili­gence firms we do ask a pletho­ra of ques­tions. Many times, there will be co-invest­ment by the spon­sor which may demon­strate align­ment of inter­est. This would be a favor­able aspect of the offer­ing.

Prop­er­ty Overview

The PPM should pro­vide details on the prop­er­ty or port­fo­lio. Sin­gle prop­er­ties may be eas­i­er to review and obtain infor­ma­tion.  Port­fo­lios of prop­er­ties will have addi­tion­al infor­ma­tion.  A sin­gle prop­er­ty may become eas­i­er to iden­ti­fy on the 45- Days iden­ti­fi­ca­tion list since port­fo­lios of prop­er­ties need to be iden­ti­fied indi­vid­u­al­ly even if offered as one acqui­si­tion.  This becomes an extra detail to avoid any con­fu­sion in the com­ple­tion of the required iden­ti­fi­ca­tion process if a 1031 exchange is being used.

Key Items to Review:

The under­ly­ing asset of the DST is real estate and as such will have the fun­da­men­tals described. This includes fun­da­men­tal loca­tion such as the demo­graph­ic, employ­ment, schools (impor­tant for mul­ti­fam­i­ly prop­er­ties). Infra­struc­ture needs such as trans­porta­tion net­works (access to rail in cer­tain areas may be impor­tant). For cer­tain prop­er­ties the ten­ant analy­sis becomes very impor­tant. What are the lease terms, renew­al risks, and cred­it wor­thi­ness? Triple net lease prop­er­ties may have cer­tain advan­tages with cred­it wor­thy ten­ants. The phys­i­cal con­di­tion of the prop­er­ty becomes impor­tant and if there was deferred main­te­nance in the case of an old­er build­ing. There may also be inde­pen­dent appraisals as well as engi­neer­ing reports includ­ed in the PPM or avail­able as a sup­ple­ment. One ele­ment to under­stand is how the prop­er­ty was acquired.  Was the acqui­si­tion through an affil­i­at­ed par­ty where the DST spon­sor has an inter­est? Spon­sors that are ver­ti­cal­ly inte­grat­ed may pro­vide some effi­cien­cies when bring­ing a DST to mar­ket. There may also be occa­sions where there has been a mark up from the affil­i­at­ed par­ty acqui­si­tion of the prop­er­ty and then the ulti­mate sale to the DST. This would be dis­closed.

One recent inclu­sion in sup­port­ing doc­u­ments may be a cost seg­re­ga­tion study on cer­tain DSTs.  Since the new leg­is­la­tion signed into law on July 4, 2025, 100% depre­ci­a­tion may again be uti­lized.

There are also the over­all fun­da­ments of the real estate invest­ment. Let’s review a Hypo­thet­i­cal Prop­er­ty Example.The prop­er­ty is a Class A mul­ti­fam­i­ly com­plex, Phoenix, AZ. The Total Acqui­si­tion price (includ­ing all cost & fees) is $80 mil­lion, 50% LTV financ­ing. The com­plex has 300 apart­ment units and is 95% occu­pan­cy. The Strengths are a strong local mar­ket fun­da­men­tals with a Diver­si­fied ten­ant base. The rent assump­tions (annu­al increas­es) are con­ser­v­a­tive. The Risks may be with the loan. If the loan has a bal­loon matu­ri­ty in sev­en years this may cause an issue. DSTs may not refi­nance the loan. There may also be high acqui­si­tion fees as well as a Lim­it­ed cap­i­tal reserve allo­ca­tion.

The investor deci­sion may be to allo­cate par­tial­ly to bal­ance risk with diver­si­fi­ca­tion across oth­er DSTs.

Finan­cial Pro­jec­tions and Assump­tions

Some­where with­in the PPM will be finan­cial pro­jec­tions.  These may be stat­ed in a chart or in a form very sim­i­lar to an excel spread­sheet. The pro­jec­tions pro­vide spon­sor expec­ta­tions but are not guar­an­teed. There may also be the ref­er­ence to pre­tax and after-tax poten­tial return. Many times, the after-tax impli­ca­tion takes into effect the high­est tax brack­et as well as a state income tax to arrive at a poten­tial total rate of 40%.  All investors may not fall under this cat­e­go­ry.

What to Eval­u­ate:

With­in the vol­umes of infor­ma­tion con­tained with­in the PPM when it comes to finan­cial aspects of the DST, there are spe­cif­ic items to review. If the prop­er­ty is a mul­ti­fam­i­ly prop­er­ty, the rent growth (past and pro­ject­ed) is a key met­ric. The occu­pan­cy rate (or vacan­cy rate) is typ­i­cal­ly expressed as a per­cent­age. Most mar­kets have detailed reports on the com­pet­i­tive set to estab­lish the vacan­cy rates.  Over the past few years occu­pan­cy rates pro­ject­ed in the PPM have come under pres­sure. The (typ­i­cal­ly pro­ject­ed) rental growth expressed as a 5% rate of growth may not hit that lev­el and may actu­al­ly be flat (or neg­a­tive) due to inter­est rate increas­es. His­tor­i­cal­ly this has moved up and down over the years.  Infla­tion may have caused expens­es to esca­late over the past few years. The dou­ble-edge sword of flat rent growth and increased expens­es (tax­es & insur­ance) may con­tin­ue to put pres­sure on the prop­er­ty. If there is a loan on the prop­er­ty anoth­er key met­ric is the debt cov­er­age ratio (DSCR). Years ago, a famil­iar term that was used was “Cap Rate Com­pres­sion”.  Many times, the com­pres­sion fac­tor cre­at­ed an oppor­tu­ni­ty for an exit. The same Net Oper­at­ing Income (NOI) when acquired may cre­ate a prof­it as cap rates com­press. If cap rates do not com­press the val­ue may not increase.

Legal Struc­ture and Com­pli­ance

DSTs are gov­erned by IRS Rev­enue Rul­ing 2004–86. This was the rul­ing that per­mit­ted DSTs to be acknowl­edged and per­mit­ted to sat­is­fy the §1031 replace­ment require­ments for com­plet­ing the exchange. There are on-going require­ments for the DST to adhere to com­ply with rul­ing.  If spon­sors vio­late any of the require­ments (known as the Sev­en Dead­ly Sins) the §1031 exchange may be in jeop­ardy and investors may face imme­di­ate tax con­se­quences.

Key Points to Con­firm for investors.

One of the first ques­tions from a CPA (who may not deal with §1031 exchanges let alone DSTs) will ask, is the DST com­pli­ant. The answer is yes. DSTs are IRS com­pli­ance for §1031 eli­gi­bil­i­ty. There are key ele­ments to under­stand. There are lim­it­ed investor rights with pas­sive own­er­ship. With pas­sive own­er­ship comes pas­sive man­age­ment.  The DST itself has restric­tions on refi­nanc­ing and improve­ments. Most PPMs will address the IRS com­pli­ance issue with state­ments regard­ing the use of §1031 exchange and how each investor should seek their own coun­sel on qual­i­fi­ca­tion.

Sub­scrip­tion Agree­ment and Investor Qual­i­fi­ca­tions

With­in the PPM there will be a sam­ple of the Sub­scrip­tion Agree­ment or Investor Ques­tion­naire.  Typ­i­cal­ly, there will be a sep­a­rate agree­ment sent for elec­tron­ic sig­na­tures with the assis­tance of the finan­cial advi­sor or bro­ker deal­er rep­re­sen­ta­tive. Final doc­u­ments gov­ern investor respon­si­bil­i­ties. If a QI is involved the instruc­tions are straight for­ward.

Key Investor Respon­si­bil­i­ties:

There are investor respon­si­bil­i­ties that need to be acknowl­edged by the investor. Start­ing with the Accred­it­ed Investor cer­ti­fi­ca­tion and the Acknowl­edge­ment of risks. The PPM also con­tains an Agree­ment to restric­tions on trans­fer­abil­i­ty.

Final thoughts on Part 2

A DST can be an effec­tive vehi­cle for tax-deferred real estate invest­ing, but it is not with­out risk. The PPM is the sin­gle most impor­tant dis­clo­sure doc­u­ment. Review of the Spon­sor and Man­age­ment, the Asset or Prop­er­ty are part of the over­all review.  Investors who care­ful­ly ana­lyze the PPM, engage pro­fes­sion­al advi­sors, and com­pare offer­ings are bet­ter equipped to pro­tect cap­i­tal and make sound deci­sions.  In Part 3 we will cov­er what many feel is the most impor­tant aspect- The Use of Pro­ceeds.

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.

Ref­er­ences

• FINRA. (2023). Under­stand­ing pri­vate place­ments. Retrieved from https://www.finra.org
• Inter­nal Rev­enue Ser­vice. (2004). Rev­enue Rul­ing 2004–86. Wash­ing­ton, D.C.
• Secu­ri­ties and Exchange Com­mis­sion. (2022). Pri­vate place­ment guid­ance. Retrieved from https://www.sec.gov

Nation­al Real Estate Investor. (2023). Trends in Delaware Statu­to­ry Trust offer­ings. Retrieved from https://www.nreionline.com