Seven Questions That Separate DST Sponsors

The offering materials always look good. Professional photography, a confident projection, a track record presented at its best angle. That is what offering materials are for.

The work of telling one sponsor from another happens in the questions you ask afterwards, and in how readily the answers arrive. Below are seven that consistently reveal something, along with what a good answer sounds like.

1. How many of your prior offerings have gone full cycle?

Full cycle means the sponsor bought a property, held it and sold it, returning capital to investors. It is the only evidence that actually proves anything.

A sponsor with forty offerings and three full cycle exits has mostly sold, not mostly performed. Anyone can acquire property in a rising market. What you want to know is what happened when they had to sell.

A good answer gives you a number, the years those exits happened and the returns. A weak answer talks about assets under management, which measures how much they have raised rather than how they have done.

2. What happened to your offerings in 2008 and in 2020?

This is the same question with the politeness removed.

Every sponsor operating through those years has stories. What matters is whether they will tell them. Did any offering suspend distributions? Did any require a capital call? Did any lose principal?

A sponsor who says nothing went wrong is either very new or not being straight with you. The useful answer is specific about what went wrong and what they did about it.

3. What proportion of the first year distribution is return of capital?

Distribution rates get quoted as though they were yields. Frequently they are partly your own money coming back to you.

There is nothing improper about that, and it is disclosed in the offering documents, but the distinction matters enormously. A 5.5 percent distribution that is entirely operating cash flow is a materially different investment from a 5.5 percent distribution where a third is return of capital.

Ask for the split. A sponsor who answers immediately has been asked before by people who knew what they were doing.

4. What are the total costs, including anything at disposition?

Sponsor, acquisition and offering costs commonly total somewhere between 10 and 15 percent before your money reaches the property, with ongoing asset management on top, and sometimes a disposition fee at the end.

The number itself is less revealing than how readily it appears. A sponsor who produces a single clear figure has nothing to manage. One who redirects you to page 94 of the private placement memorandum has told you something without meaning to.

5. What is the loan to value, and when does the loan mature?

Two numbers, and the second is the one people forget.

If a trust targets a seven year hold and the loan matures in year five, somebody has to refinance in the middle of your investment, in whatever market exists at that time. That is a real risk and it should be discussed openly.

Ask also whether the debt is genuinely non recourse at the trust level and what the carve outs are. It usually is non recourse, which is much of the point, but the exceptions vary.

6. What happens if the sale takes twelve years instead of seven?

A target hold is a target, not a commitment. Sponsors sell when the market allows, and markets do not consult anyone's timetable.

Because a DST interest is illiquid, with no exchange to sell it on and no redemption window, an overrun is not a minor inconvenience. Ask what their longest actual hold has been against what was projected.

7. What are the reserves, and what capital work is coming?

A trust with thin reserves and a significant capital programme ahead of it is relying on everything going to plan. When it does not, distributions are usually the first thing cut, because the roof is not optional and your payment is.

Ask what reserves exist, what major capital expenditure is anticipated during the hold, and what the plan is if occupancy falls.

What the answers tell you collectively

Notice that none of these questions is about the building. Property quality matters, but property quality is the easiest thing for a sponsor to present well and the hardest thing for you to independently verify.

Structure, costs, debt maturity, reserves and behaviour under stress are all knowable, comparable and much harder to dress up. They are also the things that actually determine what happens to your money.

One more point worth making. You will be asking these questions inside a 45 day identification window, which is not when careful work happens naturally. If you know a sale is coming, start this process before you close rather than after. The sponsors will still be there, and you will be asking as someone deciding rather than someone running out of time.

Nothing here is tax, legal or investment advice. 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 possible loss of principal. Past performance does not indicate future results.