How to Read a DST Private Placement Memorandum

Every Delaware Statutory Trust offering comes with two documents. There is a summary, usually attractive and short, and there is the private placement memorandum, usually long and dense.

The summary is marketing material. The private placement memorandum, commonly shortened to PPM, is the governing document. Where they differ, the PPM controls. Most investors read the first and skim the second, which is the wrong way round.

This is a practical guide to reading one when you have limited time.

What is a private placement memorandum?

The disclosure document for a securities offering sold privately rather than through a public registration. It describes the investment, the property, the structure, the risks, the fees, the people involved and the terms on which interests are offered.

It also contains the subscription documents you sign. Those are a contract, and they include representations you are making about yourself.

Why not simply rely on the summary?

Because summaries are written to be persuasive and PPMs are written to be complete. A distribution rate on a summary page is a projection. In the PPM you can usually find what that projection assumes about occupancy, rent growth, expenses and the eventual sale price.

Where a number appears in both, the assumptions behind it appear only in one.

Which sections should you read first?

Not in order from page one. Read it in this sequence.

1. Risk factors

Usually the longest section and frequently the most informative. Sponsors disclose what can go wrong because they have to, and the specific risks listed tell you what the sponsor and their counsel actually worry about for this property.

Read past the generic risks that appear in every offering and look for the ones specific to this asset: a single tenant with a lease expiring during the hold, a market with heavy new supply, a loan maturing before the projected sale, a property with deferred maintenance.

2. Sources and uses

A table showing where investor money goes. This is where you learn how much of your capital reaches the real estate.

Look for acquisition costs, sponsor fees, offering and organisational expenses, financing costs and reserves. Add up everything that is not the purchase price of the property. That figure, often expressed as a percentage of the offering, is the load, and it varies between offerings.

3. Compensation and conflicts of interest

What the sponsor earns, when, and from whom. Acquisition fees, asset management fees, disposition fees and any affiliate arrangements for property management, leasing or construction.

Affiliate arrangements are not automatically a problem, but they are a conflict and should be disclosed. Read how fees are calculated and whether any are payable regardless of performance.

4. The debt

Loan amount, rate, whether it is fixed or floating, amortisation, maturity date, and whether it is non recourse at the trust level with carve outs.

The maturity date matters more than investors expect. If the loan matures before the projected hold ends, somebody must refinance in whatever market exists then, and a Delaware Statutory Trust has limited ability to renegotiate debt without converting to a different structure.

5. The property and the tenancy

Occupancy, lease terms, tenant credit, remaining term, renewal options, and who is responsible for repairs and capital works. For single tenant assets, the identity and financial strength of the guarantor is a central fact rather than a detail.

6. Projections and the assumptions behind them

Find the assumptions table. Rent growth, expense growth, vacancy, capital expenditure and the exit capitalisation rate. The exit assumption drives much of the projected return, and a small change in it moves the outcome substantially.

Ask what proportion of early distributions is projected to be return of capital rather than operating cash flow. A distribution partly funded from reserves is not the same as one covered by the property.

7. The tax opinion

Most DST offerings include an opinion from counsel on whether the beneficial interests should be treated as interests in real property for exchange purposes, with reference to the relevant revenue ruling.

Read the wording carefully. Opinions typically say an outcome should apply rather than will apply, and they rest on assumptions and on the structure being operated as described. An opinion is professional judgment, not a guarantee, and it is not a ruling from the IRS about your particular exchange. Your own CPA should review it against your circumstances.

8. Transfer restrictions and exit

How interests can be transferred, whether there is any redemption mechanism, and what the sponsor expects to do at the end. Look also for provisions allowing conversion of the trust into a limited liability company in difficult circumstances, and understand what that would mean for a future exchange.

What is in the subscription documents?

Representations you are making. Typically that you meet accreditation requirements, that you have received and read the PPM, that you understand the investment is illiquid, and that you can bear a total loss.

Accreditation has several pathways under the securities rules, including certain professional qualifications as well as income and net worth tests, and any simplified checklist you are given is unlikely to be exhaustive. If your position is not obvious, confirm it before signing rather than ticking a box.

How do you do this inside a 45 day window?

Badly, if you start on day 40. The realistic approach is to request offering documents early, before your relinquished property closes, so the reading happens without a deadline attached.

If you are already short of time, read risk factors, sources and uses, the debt summary and the tax opinion first. Those four sections carry most of the decision.

What should you ask after reading?

• ›What proportion of the first year distribution is projected to be return of capital?
• ›What happens if the loan cannot be refinanced on the projected terms?
• ›How many prior offerings have gone full cycle, and what did they return?
• ›What are the total costs including anything payable at disposition?
• ›Under what circumstances would the trust convert to another structure?

A sponsor who answers these specifically is telling you something, and so is one who does not.

Nothing here is tax, legal or investment advice, and this article is general information rather than an analysis of any particular 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 possible loss of principal. Review any offering with your own CPA and attorney.