How to Compare Two DST Offerings

Two Delaware Statutory Trust offerings can look almost identical on a summary page. Same asset class, same sponsor tier, similar minimum. Then you read the offering documents and discover one of them carries debt at 62 percent, holds for ten years and pays a first year distribution that is largely return of capital, while the other is unleveraged, targets a five year hold and will not accept an investor below 100,000 dollars.

Neither is better. They are built for different people. The problem is that nothing on the front page of either brochure tells you which one you are.

This is a practical guide to reading an offering properly, in the order the facts actually matter when you are inside a 45 day identification window and do not have a month to spend on it.

Start with the five numbers

Everything else is commentary. Get these five in front of you for every offering you are considering, on one page, before you read a single page of marketing.

Minimum investment

Usually between 25,000 and 100,000 dollars, occasionally higher. This decides whether you can spread your proceeds across several trusts or whether one offering will absorb most of what you have.

It matters more than people expect. If you are exchanging 900,000 dollars and the minimum is 100,000, you have nine units of flexibility. If the minimum is 250,000, you have three, and the diversification argument that brought you to a DST in the first place is largely gone.

Target hold period

Typically five to ten years. This is the single most under read number in the document.

A DST interest is illiquid. There is no exchange to sell it on, no redemption window and no guarantee anyone will buy it from you privately. If the sponsor is targeting a ten year hold and you are 74 years old, that is a materially different decision than the same offering presented to someone who is 58.

Note also that the target is a target. Sponsors sell when the market allows, which can be earlier or considerably later than planned.

Loan to value

Expressed as a percentage. Zero means the trust is unleveraged and paid cash for the property.

This is the number that decides whether an offering can solve your problem at all. If the property you sold carried a mortgage, you generally have to replace that debt or the shortfall is taxed as boot. An unleveraged DST cannot replace debt. A DST at 50 percent leverage replaces debt at 50 cents on every dollar you invest.

Work out your own requirement first, then filter. Doing it the other way round wastes the time you do not have.

Asset class and the tenant behind it

Multifamily, industrial, medical office, self storage, net lease retail. Each behaves differently in a downturn and each carries a different concentration of risk.

Read past the label to the tenancy. A single tenant industrial building let to an investment grade company on a fifteen year lease is a bond like risk. A 300 unit apartment community with annual leases is an operating business. Both are called real estate.

The load

Total fees and costs deducted before your money reaches the property, usually somewhere between 10 and 15 percent across acquisition, offering and sponsor costs, with ongoing asset management on top.

The number itself is less revealing than how readily the sponsor shows it to you.

What the five numbers will not tell you

Some of the most important information is not a number at all.

• ›Whether the distribution is actually income. Early distributions are often partly return of your own capital. Ask what proportion of the first year distribution is projected to be return of capital rather than operating cash flow.
• ›What happens at the end. Most trusts sell the asset and distribute the proceeds, at which point you must exchange again or pay the tax you deferred. Some offer a 721 UPREIT conversion into operating partnership units instead, which is a very different outcome and forecloses future 1031 exchanges.
• ›How the sponsor behaved in 2008 and in 2020. Anyone can run a trust in a rising market. Ask directly how many of their prior offerings have gone full cycle, what those returned, and whether any suspended distributions.
• ›Whether the debt is genuinely non recourse. It usually is at the trust level, which is the point, but the carve outs vary and they are worth understanding.
• ›What the reserves look like. A trust with thin reserves and a large capital expenditure programme ahead of it is relying on everything going to plan.

The comparison that actually helps

Put two offerings side by side and ask one question about each difference you find: does this difference matter to me specifically?

A ten year hold is a problem for a 74 year old and irrelevant to a family trust with a thirty year horizon. Sixty percent leverage is essential if you carried a large mortgage and actively unwelcome if you sold free and clear and wanted to deleverage. A 50,000 dollar minimum matters enormously if you are exchanging 400,000 dollars and not at all if you are exchanging four million.

Most comparison advice is written as though there is a correct answer. There is not. There is an answer that fits your capital, your timeline, your tax position and your tolerance for being unable to sell.

Five questions worth asking before you commit

• ›How much of the projected first year distribution is return of capital?
• ›How many of your prior offerings have gone full cycle, and what did they return?
• ›What is the loan to value, and when does the loan mature relative to the target hold?
• ›What happens if the sale takes twelve years instead of seven?
• ›What are the total costs, including anything paid at disposition?

If the answers arrive slowly, or arrive as marketing rather than numbers, that is information too.

The practical problem

All of this assumes you can see the offerings in the first place, which is where most owners get stuck.

DST interests are securities offered to accredited investors only. That is why no site simply publishes the current offerings on an open page. Go direct to a sponsor and you see that sponsor's own inventory, presented by the people who created it. Comparing across sponsors means repeating the exercise several times and holding it all in your head, and what is open changes constantly as offerings fill and close.

If you are inside a 45 day identification window, that is time you do not have.

The five numbers above are exactly the ones worth assembling in a single view before you commit to anything, and exactly the ones a sponsor brochure is least likely to place next to a competitor's.

Nothing here is tax, legal or investment advice, and a Delaware Statutory Trust is not the right answer for everybody. Work your own position through with your CPA before you act on any of it.