Risks of Delaware Statutory Trust “DST” Investments

Delaware Statu­to­ry Trust invest­ments, includ­ing DSTs used in con­nec­tion with Sec­tion 1031 exchanges, involve sig­nif­i­cant risks and are not suit­able for all investors. DST inter­ests are typ­i­cal­ly pri­vate place­ment secu­ri­ties, often offered under Reg­u­la­tion D, and may be avail­able only to accred­it­ed investors or oth­er­wise qual­i­fied pur­chasers. Pri­vate place­ments may be illiq­uid, may pro­vide lim­it­ed dis­clo­sure com­pared with reg­is­tered offer­ings, and investors must be able to bear the risk of loss, includ­ing pos­si­ble total loss.

Poten­tial investors should care­ful­ly review the Pri­vate Place­ment Mem­o­ran­dum, sub­scrip­tion doc­u­ments, prop­er­ty infor­ma­tion, loan doc­u­ments, spon­sor mate­ri­als, tax dis­clo­sures, and all risk fac­tors before invest­ing. Investors should con­sult their own legal, tax, finan­cial, and real estate pro­fes­sion­als before mak­ing any invest­ment deci­sion.

Key Risks May Include:

Illiq­uid­i­ty Risk
DST inter­ests are gen­er­al­ly long-term, illiq­uid invest­ments. There may be no pub­lic mar­ket for the inter­ests, and investors may not be able to sell, trans­fer, or redeem their inter­ests when desired, or at an accept­able price.

Risk of Loss
DST invest­ments are sub­ject to real estate, mar­ket, spon­sor, financ­ing, ten­ant, and oper­a­tional risks. Investors may lose some or all of their invest­ed cap­i­tal.

No Guar­an­teed Income or Dis­tri­b­u­tions
Cash flow, dis­tri­b­u­tions, and pro­ject­ed returns are not guar­an­teed. Dis­tri­b­u­tions may be reduced, sus­pend­ed, delayed, or ter­mi­nat­ed. In some cas­es, dis­tri­b­u­tions may include a return of investor cap­i­tal or pro­ceeds from bor­row­ings rather than oper­at­ing cash flow, which may reduce the amount avail­able for invest­ment oper­a­tions. FINRA guid­ance cau­tions that dis­tri­b­u­tion pay­ments should not be described as guar­an­teed and should not be pre­sent­ed as com­pa­ra­ble to bond yield or fixed income yield.

Real Estate Mar­ket Risk
DST prop­er­ties are affect­ed by changes in real estate val­ues, rental rates, occu­pan­cy, local eco­nom­ic con­di­tions, inter­est rates, infla­tion, sup­ply and demand, zon­ing, tax­es, insur­ance costs, and oth­er mar­ket fac­tors.

Ten­ant and Lease Risk
The suc­cess of a DST may depend heav­i­ly on one or more ten­ants. Ten­ant default, lease ter­mi­na­tion, fail­ure to renew, rent con­ces­sions, or reduced occu­pan­cy can neg­a­tive­ly affect income and prop­er­ty val­ue.

Con­cen­tra­tion Risk
Some DSTs hold a sin­gle prop­er­ty, a small num­ber of prop­er­ties, one asset class, or prop­er­ties in lim­it­ed geo­graph­ic mar­kets. Lack of diver­si­fi­ca­tion may increase risk.

Spon­sor and Man­ag­er Risk
Investors rely on the spon­sor, trustee, asset man­ag­er, prop­er­ty man­ag­er, and oth­er third par­ties to oper­ate the DST and make deci­sions. Poor man­age­ment, con­flicts of inter­est, spon­sor finan­cial prob­lems, or oper­a­tional errors may neg­a­tive­ly affect the invest­ment.

Lim­it­ed Investor Con­trol
DST investors gen­er­al­ly have lim­it­ed or no con­trol over prop­er­ty man­age­ment, leas­ing, financ­ing, sale tim­ing, refi­nanc­ing, cap­i­tal expen­di­tures, or oth­er major deci­sions.

Lever­age and Debt Risk
Many DSTs use mort­gage debt. Lever­age can increase poten­tial returns but also increas­es risk. Ris­ing inter­est rates, loan matu­ri­ty, refi­nanc­ing risk, lender restric­tions, covenant defaults, or fore­clo­sure may adverse­ly affect the invest­ment.

Refi­nanc­ing and Struc­tur­al Lim­i­ta­tions
DSTs used for 1031 exchange pur­pos­es must gen­er­al­ly oper­ate with­in strict tax and struc­tur­al lim­i­ta­tions. IRS Rev­enue Rul­ing 2004–86 pro­vides that a qual­i­fy­ing DST inter­est may be treat­ed as real prop­er­ty for Sec­tion 1031 pur­pos­es if the applic­a­ble require­ments are sat­is­fied, but the rul­ing also notes that addi­tion­al trustee pow­ers, such as the pow­er to acquire new prop­er­ty, rene­go­ti­ate leas­es, refi­nance debt, or make more than minor non-struc­tur­al mod­i­fi­ca­tions, may cause dif­fer­ent tax clas­si­fi­ca­tion.

1031 Exchange and Tax Risk
Tax defer­ral under Sec­tion 1031 is not guar­an­teed. Investors must sat­is­fy strict IRS rules, includ­ing iden­ti­fi­ca­tion, tim­ing, qual­i­fied inter­me­di­ary, like-kind prop­er­ty, and rein­vest­ment require­ments. Changes in tax law, IRS guid­ance, or fail­ure to meet exchange require­ments may result in tax­able gain.

Val­u­a­tion Risk
DST inter­ests are not pub­licly trad­ed. Val­u­a­tions may be based on esti­mates, appraisals, spon­sor assump­tions, or lim­it­ed mar­ket data and may not reflect the amount an investor could receive upon sale or liq­ui­da­tion.

Exit Strat­e­gy Risk
The tim­ing and method of exit are uncer­tain. A DST prop­er­ty may be sold ear­li­er or lat­er than expect­ed, and the sale price may be low­er than pro­ject­ed. Investors may not be able to con­trol whether pro­ceeds are returned in cash, rein­vest­ed, or offered through anoth­er struc­ture.

UPREIT or Roll-Up Risk
Some DST offer­ings may include an option or pos­si­bil­i­ty of con­vert­ing into oper­at­ing part­ner­ship units of a REIT or sim­i­lar struc­ture. Such trans­ac­tions may cre­ate addi­tion­al liq­uid­i­ty, val­u­a­tion, tax, and con­trol risks, and may lim­it future 1031 exchange options.

Fee and Expense Risk
DST invest­ments may involve sell­ing com­mis­sions, due dili­gence fees, spon­sor fees, acqui­si­tion fees, asset man­age­ment fees, financ­ing fees, prop­er­ty man­age­ment fees, dis­po­si­tion fees, and oth­er expens­es. These costs may reduce investor returns.

Con­flicts of Inter­est
Spon­sors, bro­ker-deal­ers, invest­ment advis­ers, prop­er­ty man­agers, affil­i­ates, and oth­er par­ties may receive com­pen­sa­tion or have inter­ests that dif­fer from those of investors.

Reg­u­la­to­ry and Secu­ri­ties Risk
DST inter­ests are secu­ri­ties and may be offered through pri­vate place­ments exempt from SEC reg­is­tra­tion. Pri­vate place­ments may involve few­er required dis­clo­sures than reg­is­tered offer­ings and may be sub­ject to trans­fer restric­tions. Rule 506(b) offer­ings, for exam­ple, gen­er­al­ly pro­hib­it gen­er­al solic­i­ta­tion and result in restrict­ed secu­ri­ties.

Envi­ron­men­tal and Prop­er­ty Con­di­tion Risk
Prop­er­ties may be affect­ed by envi­ron­men­tal con­t­a­m­i­na­tion, deferred main­te­nance, con­struc­tion defects, nat­ur­al dis­as­ters, casu­al­ty events, insur­ance lim­i­ta­tions, or com­pli­ance issues.

Macro­eco­nom­ic Risk
Infla­tion, reces­sion, cred­it mar­ket dis­rup­tion, ris­ing inter­est rates, changes in employ­ment, demo­graph­ic trends, and cap­i­tal mar­ket con­di­tions may neg­a­tive­ly affect prop­er­ty income, financ­ing, and val­u­a­tion.

Suit­abil­i­ty Risk
DST invest­ments are not appro­pri­ate for all investors. They may be suit­able only for investors who under­stand pri­vate real estate risks, can tol­er­ate illiq­uid­i­ty, do not need imme­di­ate access to invest­ed cap­i­tal, and can bear the pos­si­bil­i­ty of los­ing their invest­ment.

This infor­ma­tion is pro­vid­ed for edu­ca­tion­al pur­pos­es only and does not con­sti­tute an offer to sell or a solic­i­ta­tion to buy any secu­ri­ty. Any invest­ment in a DST should be made only through the applic­a­ble offer­ing doc­u­ments and after con­sul­ta­tion with the investor’s legal, tax, and finan­cial pro­fes­sion­als. Fidu­cia­ry Cap­i­tal Man­age­ment does not guar­an­tee invest­ment per­for­mance, tax treat­ment, income, liq­uid­i­ty, or preser­va­tion of cap­i­tal.