What a DST Actually Costs You

Ask most people what a Delaware Statutory Trust costs and they will talk about the minimum investment. That is not the cost. That is the ticket price.

The real question is different and much more useful: of every dollar you put in, how much actually buys real estate?

The answer is never one hundred percent, and it is not one hundred percent when you buy a building directly either. But in a DST the gap is larger, it is disclosed in a document most people skim, and it is the single most important thing to understand before you compare one offering against another.

This article explains what the costs are, where the number is written down, and how to think about it. It is educational only and is not tax, legal or investment advice. Every offering is different and the only authority on any specific one is its own offering document.

The word you are looking for is load

Load is the industry term for everything that sits between your money and the property. It is not hidden, and it is not improper. It pays for work that genuinely has to happen: someone found the building, negotiated it, arranged the financing, wrote the legal structure, and distributed the offering. None of that is free.

What matters is that the load is disclosed, that you know what it is, and that you compare it across offerings rather than assuming it is the same everywhere. It is not the same everywhere.

Where the number is written down

In the offering document, usually the Private Placement Memorandum, there is a section titled something close to Estimated Use of Proceeds. It is a table. It shows the total amount being raised and then lists where it goes.

That table is the most important page in the document, and it is the one page most investors do not read carefully. It will show you, in dollars, how much of the raise is being spent on the property itself and how much on everything else.

If someone shows you an offering and cannot immediately point you to that table, that is a meaningful signal in itself.

What the categories usually are

The labels vary between sponsors, which is part of why comparing is harder than it should be. Broadly you will see some combination of the following.

Charged once, at the start:

• ›Acquisition fee. Paid to the sponsor for finding, underwriting and buying the property.
• ›Offering and selling costs. Commissions to the broker dealer distributing the offering, wholesaling costs, marketing and printing.
• ›Due diligence and legal. Third party reports, environmental, title, appraisal, structuring the trust, drafting the document.
• ›Reserves. Money held back for capital expenditure, tenant improvements or a shortfall in operating income. Worth noting that reserves are not really a fee at all, since the money stays inside the deal for your benefit, but it does mean it is not buying property on day one.

Charged every year you hold:

• ›Asset management fee. Paid to the sponsor for running the property.
• ›Property management fee. Often paid to an affiliate of the sponsor, which is worth checking.

Charged at the end:

• ›Disposition fee. Paid to the sponsor when the property is eventually sold.

The first group reduces how much property your money buys. The second and third reduce what you receive while you hold it and when it exits.

An illustrative example

Suppose an offering raises one million dollars and its use of proceeds table shows eight hundred and fifty thousand going to the property, with the remaining one hundred and fifty thousand covering acquisition, offering costs, legal and reserves.

Your one hundred thousand dollar position therefore represents eighty five thousand dollars of real estate on day one. The property has to appreciate by roughly eighteen percent simply for you to be back to even on the capital, before any consideration of what it distributed along the way.

This example is illustrative and is not drawn from any actual offering. Real figures vary considerably between sponsors, asset classes and market conditions, and the only number that matters is the one in the document in front of you.

That arithmetic is not an argument against DSTs. It is the arithmetic of the structure, and it is why the hold period matters so much: costs incurred once are spread across however many years you hold, so a five year hold and a ten year hold are very different propositions from the same starting number.

What it is fair to compare it against

The honest comparison is not against zero, because buying a building yourself is not free either.

Do that instead and you will pay a broker commission, legal fees, title and escrow, an appraisal, inspections, environmental work, loan origination points and lender legal costs. If you use a property manager, that is an ongoing fee too. When you eventually sell, you pay a commission again.

The difference is not that one has costs and the other does not. The differences are that direct purchase costs are more visible because you write each cheque yourself, they are somewhat negotiable, and you are doing the work that the sponsor's acquisition fee pays for.

What you get in exchange for a DST's load is that the property is already bought, the financing is already arranged, the debt is non recourse to you, and the whole thing can close in days rather than weeks. Whether that is worth it depends entirely on your situation, and if you are on day fifty of a forty five day identification window the calculation looks very different than if you have all the time in the world.

Four questions worth asking

If you are looking at a specific offering, these four will tell you most of what you need.

• ›What percentage of the raise goes into the property? Ask for the number, not a description of it. Any sponsor or specialist who cannot answer this immediately is not someone to rely on.
• ›What is paid to affiliates of the sponsor? Property management and disposition fees often go to a related entity. That is common and disclosed, but you should know it.
• ›How large are the reserves and what triggers their use? Larger reserves reduce day one property exposure but reduce the risk of a distribution being cut later. Reasonable people differ on the right level.
• ›What is the target hold period? The load is fixed. The longer the hold, the more years it is spread over. This is why hold period and load have to be read together rather than separately.

The short version

The minimum investment tells you whether you can participate. The load tells you what you are actually buying. They are different numbers and only one of them is on the front page.

Ask for the use of proceeds table, read it, and compare it across every offering you are shown. A sponsor with a higher load is not automatically worse, because they may be delivering a better property or a more conservative structure. But you cannot make that judgement at all until you know what the number is.

Want the current options with the numbers laid out side by side? Download the current property list and a licensed specialist will walk you through the use of proceeds on anything you are considering. Free, and no obligation.

About this article. 1031Property is an independent information and referral service. We are not a broker dealer, a Qualified Intermediary, a tax adviser or a law firm, and we do not sell securities or property. Nothing here is tax, legal or investment advice, and no figure here describes any specific offering. Delaware Statutory Trust interests are securities offered to accredited investors only through a licensed broker dealer and definitive offering documents, and investing involves risk including the loss of principal. Read every offering document in full and confirm your position with your own CPA and adviser.