This is Part 3 of the series on the review of the PPM. There are many experts who feel the Use of Proceeds is the most important part of the PPM. In Part 1 How to Review a Private Placement Memorandum (PPM) Part 1 we covered Compliance, Investor Protection and Registration as well as DST qualifying for §1031 exchange. In part 2 How to Review a Private Placement Memorandum (PPM) Part 2 we covered the Sponsor and Management as well as the review of the underlying Asset or Property.
Use of Proceeds
Over the past numbers of years, we have attended independent third-party conferences where PPMs (as well as Sponsor background and experience) are reviewed, and the attending attorneys opine on the structure and function of the PPM. Most of these participants agree that the “Use of Proceeds” section is one of the most important parts of a Delaware Statutory Trust (DST) Private Placement Memorandum (PPM). This is because it outlines exactly how investor capital will be used. This directly impacts the risk, return, transparency, and credibility of the investment. If you’re evaluating a DST PPM and the “Use of Proceeds” section is vague, overly complex, or seems heavily skewed toward sponsor profits — that’s a red flag.
Here’s why it matters so much:
1. Investor Transparency & Trust
Investors want to know where their money is going. The “Use of Proceeds” section provides a detailed breakdown of how the sponsor plans to allocate funds: purchase price, fees, reserves, improvements, commissions, etc. Full disclosure builds trust and reduces the risk of misrepresentation or fraud.
2. Risk Assessment
How proceeds are used gives investors insight into the risk profile of the DST. There are two elements that may be very observable. A high percentage going to fees or commissions could be a red flag. A large reserve allocation could indicate caution or anticipated capital needs. Certain investors may require leverage (for debt replacement in a §1031 exchange) other investors may desire leverage to increase potential tax efficiencies. Investors can evaluate whether the leverage (if any) is reasonable and whether capital expenditure is being used to improve the asset or just to maintain it.
3. Fee Structure Clarity
Attempting to have a clear view of the fee structure may be challenging at times. Most PPMs will have a list of the associated fees that are needed to bring the DST to the market. DST investments often have layered fees (e.g., acquisition fees, loan fees, property management fees). This section shows how much of the investor’s money goes to the actual real estate asset versus to the sponsor or intermediaries. It helps compare offerings across sponsors and avoid overpriced deals. Third party reports will evaluate how fees of the PPM (offering) are being evaluated compared to other offerings and programs. Here is an example of a third-party evaluation firm reviewing that aspect. [Reporting firm] assessed the fees and expenses for this offering relative to the fees and expenses of other recent DST offerings. The industry medians and middle-eighty percentile ranges (labeled as DST Range throughout this section) were derived using information from private DST offerings analyzed by [Reporting Firm] between [Date] and [Date].
Larger offerings may have more potential efficiencies than small offerings when evaluating fee structure. There are basic costs for the legal aspects (compliance) to facilitate the proper structure of the DST. Here is an example of a third-party evaluation firm reviewing that aspect. Offering expenses are above the typical DST industry range, due to the presence of a wholesaler fee, and above average organization and offering (O&O) costs, which is a function of the fixed costs of a relatively small equity raise.
4. Alignment of Interests
Alignment of interest is how the sponsor structures the use of proceeds reflects their alignment with investors. Are they investing alongside the investors? Are they front-loading fees? A fair, transparent allocation usually indicates a sponsor is more likely to act in the best interests of investors. Here is an example of a third-party evaluation on interest and fees. [Reporting Firm] considers the front-end and back-end sponsor compensation to be within the typical range for multifamily DST offerings that [Reporting Firm] has recently analyzed. However, the ongoing operating compensation metrics are slightly higher than the industry range due to the relatively small size of the program.
5. Regulatory & Legal Protection
Inaccurate or vague use-of-proceeds disclosures can lead to legal consequences under SEC rules (especially for Reg D offerings). This section protects both the investors and the sponsor by clearly documenting expectations.
Summary
| Why It Matters | What It Tells You |
| Transparency | Where your money is really going |
| Risk & Financial Health | Leverage, reserves, capital expenses, etc. |
| Sponsor Incentives | Are they taking too much up front? |
| Legal/Regulatory Compliance | SEC protection via clear disclosures |
| Investment Quality Signal | Efficient vs. wasteful use of capital |
Here’s a sample “Use of Proceeds” breakdown for a typical DST offering, showing how investor capital might be allocated. This is a simplified version, but it reflects common structures seen in real estate DST private placements.
Total Offering Size: $80,000,000
DST Property Type: Multifamily Apartment Complex
Leverage: 50% LTV (Loan of $40M; Total Project Value = $80M)
| Category | Amount ($) | % of Total Offering | Description |
| Real Estate Purchase Price | $72,500,000 | – | Paid via equity + debt (total offering is greater than purchase price) |
| Equity Portion of Purchase | $32,000,000 | 80.00% | Investor equity used to partially fund acquisition |
| Acquisition Fee (to Sponsor) | $1,200,000 | 3.00% | One-time fee to sponsor for sourcing/deal structuring |
| Loan Fees & Closing Costs | $800,000 | 2.00% | Legal, title, loan origination, appraisals, etc. |
| Broker-Dealer Commissions | $2,000,000 | 5.00% | Sales commissions to BD reps (if applicable) |
| Reserves / Working Capital | $1,600,000 | 4.00% | Capital reserves for repairs, tenant turnover, etc. |
| Organizational & Offering Costs | $1,600,000 | 4.00% | Legal, PPM drafting, marketing, admin costs |
| Total Use of Proceeds | $40,000,000 | 100.00% | (Rounded) |
Key Insights from This Example
There are a few items to amplify from the example above. 80% of funds go directly toward the real estate equity. This is a good sign, indicating that most of the capital raised is being invested. The total Fees reflecting the3% acquisition plus 5% commissions and 4% organizational costs equal a total 12% of the raise. This may indicate the DST is worth comparing to other DSTs. $1.6M in reserves shows some cushion for property expenses or capex (if indicated in the PPM). This helps reduce operational risk. Note: reserves not used are returned to investors.
What to Watch for in Real Deals
Well, it may be obvious that if there are too many fees (15–20%) this reduces how much capital is working for the investment. Not all DST will have reserves (Potentially in the case of triple net lease structures with large players like Amazon). However, no reserves may signal future capital calls (which DSTs typically can’t make). There may be Hidden fees in other sections. Many advisors well versed in DST will cross-reference with the “Fees and Compensation” section.
Nearly Final Questions to Ask regarding the Use of Funds: (there are many, but here are a few in summary)
- What percentage of funds for property acquisition versus fees and reserves?
- Are selling commissions and organizational costs clearly disclosed?
- Does the sponsor retain a performance promotion or other incentive compensation?
Overall Best Practices for Reviewing a PPM
- Read beyond the executive summary.
- Engage tax, legal, and real estate advisors.
- Compare fee structures across offerings regarding the Use of Funds.
- Understand leverage and refinancing terms.
- Assess sponsor alignment and co-investment.
Conclusion
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. Investors who carefully analyze the PPM, engage professional advisors, and compare offerings are better equipped to protect capital and make sound decisions.
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
