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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A DST due diligence checklist helps you test the property, people, debt, fees, and legal terms before you invest. The goal is to connect each important claim to evidence, then decide whether the risks fit your exchange and your life.
A Delaware statutory trust, or DST, can make real estate ownership feel simple from the outside. You invest, a manager runs the property, and you receive reports. The work behind that simple experience is anything but simple. A useful review file explains what you own, where the money goes, and what happens when the plan falls short.
This checklist is an investor's working guide. It is not a score that certifies an offering, and it does not replace advice on your specific transaction. Keep three possible answers beside each item: supported, unresolved, or unacceptable. A polished answer without a source belongs in the unresolved column.
Create one folder for each offering. Put its exact legal name, document version, and review date at the top of a short cover sheet. Similar names can hide different entities, properties, and debt terms. Keep the sponsor's legal name separate from the name of the trust issuing your interest.
Ask for the current offering documents, trust agreement, subscription agreement, financial projections, property reports, debt summary, and fee schedule. Some documents may require a secure review process. Record a missing document as missing rather than assuming the brochure covers it. Ask whether amendments have changed earlier terms.
Use a simple record for each question:
For example, “the building is fully leased” is a claim. A current rent roll is evidence of signed leases, but it does not by itself prove that tenants are paying. A collection report helps close that gap. You may need both to judge current income.
Keep dated written answers with the file. A phone conversation can help you understand a point, but a later reviewer needs to know what was answered and which facts were used.
Write down the income you need from this capital, cash you will keep outside the exchange, and expenses that may arise during the holding period. Separate a preference for income from a need that must be met every month. A projected payment is a weak foundation for an expense you cannot delay.
Then state how much loss and illiquidity you can bear. Ask what would happen if distributions stopped for a year or the investment could not be sold when expected. This is not a forecast. It is a way to see whether a bad outcome would create a personal cash crisis.
Private placements can be hard to sell and may involve loss of the entire investment. Offering documents may provide less information than public-company filings. The SEC also warns that a private placement memorandum is generally not reviewed by a regulator. Eligibility to invest does not settle whether an investment fits you. [1]
Finally, list any deal breakers. They might concern debt maturity, one large tenant, an exit you do not understand, or a fee you cannot reconcile. Defining these limits first makes it harder for an attractive headline number to move them later.
Map the sponsor, trustee, asset manager, property manager, master tenant if any, lender, and selling firm. Ask which entities share owners or executives. A familiar brand can sit above several companies with different duties and different balance sheets.
Request the names and roles of the people who will handle this property. A firm's long history does not prove that the current team has worked together through a difficult period. Ask what happens if a key person leaves and who can replace a manager under the documents.
Review relevant completed investments, troubled investments, and those still held. Keep original forecasts separate from actual outcomes. Ask for the time period, fees included, debt used, and population of deals behind any track-record claim. One successful sale says little about omitted losses.
FINRA's guidance tells member firms to investigate a private placement before recommending it, with the scope shaped by the facts. It addresses management, assets, claims, use of proceeds, conflicts, and unresolved warning signs. An investor checklist supplements that work; it does not shift the firm's duties to the client. [2]
Use BrokerCheck for the selling professional and broker-dealer. Its reports can show registration history and disclosures. Read the status and context of an event; an allegation is not a proven finding. A clean report is not an investment guarantee, and the tool is not a complete database of every real estate sponsor. [3]
Build a property sheet with the address, ownership entity, acquisition date, purchase price, property type, size, age, and current use. For a portfolio, create a separate sheet for each location. A portfolio total can hide a weak building or an outsized exposure.
Review the rent roll alongside signed lease terms and recent collections. Note lease expirations, renewal options, free rent, unpaid balances, and tenant rights to leave. Compare physical occupancy with the share of expected rent actually collected. Those measures answer different questions.
For a single-tenant building, identify the legal tenant and any guarantor. A national name on the sign is not enough. Ask which company owes the rent and what support, if any, another company has promised in writing.
For apartments or other properties with many users, inspect the assumptions that turn demand into collected income. Review concessions, turnover, vacant units that need work, and the cost to attract new tenants. A higher advertised rent helps little if units remain empty.
Ask for support at the property's scale. A growing metro area may still contain an oversupplied neighborhood. Look for recent competing leases, nearby construction, and the practical reasons tenants choose this building. Record where the analysis relies on a forecast rather than a signed contract.
A property condition report is more useful when you can trace its recommended work into the budget. Match roofs, paving, equipment, building systems, and other major items to expected dates and dollar amounts. Identify work due soon and work that could grow if delayed.
Ask what the review did not cover. A limited inspection, an inaccessible roof, or a specialist item outside the report's scope can leave a real gap. Find out whether follow-up work was completed and whether the estimate includes labor, permits, and a cushion for cost changes.
Do the same with environmental review. EPA describes All Appropriate Inquiries as a process to assess environmental conditions and potential liability. Meeting a process standard is not a promise that the property is clean or that all liability is gone. Ask qualified counsel how the reports and any continuing duties apply to this owner. [4]
Review insurance limits, deductibles, exclusions, and renewal dates against the actual hazards. A policy summary may not answer whether a specific loss is covered. Ask who reviewed that question and what cash is available before insurance pays.
Separate money already funded from money expected to arrive later. A reserve funded at closing is different from a plan to retain future cash. Neither is unlimited. A reserve budget should show what is committed, what is flexible, and what would be left after a major repair.
List the loan balance, interest rate, rate type, payment schedule, maturity date, and any interest-only period. Note what changes when that period ends. Include required reserves, cash controls, prepayment costs, and conditions that let the lender restrict distributions.
Ask for the basis of the quoted loan-to-value ratio. A ratio based on the lender's appraisal can differ from one based on the property's purchase price or the total price paid by investors. The denominator belongs beside the percentage.
Consider a hypothetical property worth $20 million with $10 million of debt. That is 50% property-level LTV. If its value falls to $16 million while debt stays at $10 million, LTV rises to 62.5%. Before selling costs, the property's equity falls from $10 million to $6 million, a 40% decline.
This example shows how debt can magnify a change in value. It does not estimate any offering's return. Fees, reserves, principal payments, and actual sale costs would change an investor's result.
The OCC's commercial real estate lending handbook discusses cash flow, collateral value, lease risk, and stress testing. Those are useful review concepts, but the handbook governs bank supervision; it does not give a DST power to refinance or set a universal safe leverage level. [5]
Ask for a bridge from property revenue to projected investor distributions. Begin with collected rent and other income. Subtract operating costs, debt payments, trust-level costs, and required cash retained for future needs. Note where a payment moves between related companies.
Do not confuse net operating income with cash available to investors. NOI commonly excludes debt service and capital spending. Ask how the offering defines it and which costs sit below that line.
Here is a simplified annual example. A property generates $1.5 million of NOI. Debt service uses $900,000, trust-level costs use $100,000, and planned reserves use $150,000. That leaves $350,000 before any other items. On $7 million of investor equity, the amount equals 5%.
If NOI falls 10% to $1.35 million and the other items stay fixed, the remainder falls to $200,000, or about 2.86% of that equity. A modest change in the top line can create a much larger change in the amount left over.
Ask whether the initial distribution uses operating cash, funded reserves, or another permitted source. A stable payment does not by itself prove that rent covered it. Keep expected cash payments, taxable income, and total investment return in separate columns.
List each fee by recipient, purpose, timing, and calculation base. A percentage of total offering proceeds is not the same as a percentage of annual revenue. Ask for dollar amounts as well as percentages.
Begin with the difference between the property's acquisition cost and the total capitalization of the offering. Some of that difference may fund reserves, closing costs, sales compensation, or other disclosed items. Identify each use instead of treating the entire difference as one fee or ignoring it.
Then review ongoing property and asset management charges, financing costs, and expenses charged to the trust. At exit, examine sale costs, debt payoff, and any sponsor compensation. Ask whether an illustration shows returns before or after each item.
A fee is not automatically unreasonable because it exists. Nor does disclosure make its effect small. Your question is what service you receive, how incentives work, and how much growth or income is needed to cover the cost.
Keep related-party payments visible. If the same group earns money from acquisition, management, financing, and sale, analyze the combined effect. A set of small-looking line items may matter when added together.
Read the trust terms for decisions about reserves, property sales, manager changes, transfers, and unusual events. Identify where investors have a vote and where the trustee or another party decides. Passive ownership has practical value, but it also means giving up control.
Revenue Ruling 2004-86 addresses a DST with specific restrictions on its powers, including new contributions, debt changes, and property activity. The ruling is not blanket approval of every trust bearing the DST label. Have counsel connect the actual structure and tax opinion to the relevant facts. [6]
Ask what happens if the business needs a response the trust cannot make. Some documents describe a transfer into a different entity under stated conditions. Understand the decision rights and possible tax effects; do not assume such a step preserves future exchange options.
For the exit, separate the target holding period from an enforceable right to receive cash. Ask whether a proposed sale, transfer, or later contribution depends on another party's choice. If a 721 contribution is discussed, identify whether investors can decline and what declining actually permits.
Model the possibility that the exit takes longer or produces less than planned. Your personal plans should not require a sale on the exact date shown in a forecast.
Choose two or three events that matter most for this property. A lease ending near debt maturity may deserve more attention than a minor change in office costs. A large roof bill may matter more than a national rent forecast.
Ask how each event changes cash flow, reserves, and decision rights. Then combine events that could occur together. A tenant departure can reduce rent, create repair costs, and weaken a future sale price at the same time.
Use ranges instead of pretending you know one precise future. Record the starting assumption and the result. Do not assign a likelihood unless there is a sound basis for doing so. A stress case asks what happens; it is not a prediction that it will happen.
Finally, ask for the strongest argument against buying. If the answer is only a general warning about real estate, return to the file. The review should identify the few specific assumptions on which this particular plan depends.
Review the unresolved column with your advisers. Some gaps can be answered with another document. Others are uncertainties you must accept or reject. Do not convert an unknown into a favorable assumption merely because the exchange clock is running.
Mark each answer with a date and the person responsible. If an answer changes a forecast, update the model rather than keeping both versions without explanation. Confirm that final documents match the terms you reviewed.
Prepare a short decision note with the proposed amount, main reasons to invest, main reasons to pass, and conditions that remain. Include the role this holding would play beside your other assets. Several offerings can still depend on the same tenant, market, manager, or loan date.
Ask your qualified intermediary and tax adviser to confirm the exchange mechanics separately. An attractive property does not repair an invalid identification or a missed deadline. Likewise, an exchange that meets its tax rules can still be a poor investment.
Give the file a final version check before signing. A revised rent roll, insurance renewal, or loan term can change a conclusion reached weeks earlier. Ask whether any material events have occurred since the last update. Keep the signed documents with the decision note, so the first investor report can be compared with the plan you actually accepted. That creates a useful starting point for monitoring the holding without pretending that a careful initial review can predict every future event.
There is no single item that makes the rest unnecessary. Start with the claims most likely to change your decision, then link them to current evidence. For one offering that may be a tenant's lease and credit. For another it may be debt maturity, building condition, or cash-flow assumptions. A serious unresolved issue should not disappear inside a high overall score.
No. Ask who commissioned the report, what documents were reviewed, when the work occurred, and what was outside its scope. Read qualifications and unresolved findings. FINRA's guidance says a member firm using third-party work still has responsibilities for its investigation. The existence of a report is not the same as a favorable conclusion. [2]
No. The SEC explains that Form D is a notice filing and does not mean the agency has approved an offering. Treat it as one piece of identifying information. Match the issuer and offering details to the documents you received, but do not use the filing as evidence that the investment is sound. [1]
A capable team can matter, but it cannot make every price, lease, or loan attractive. Review the actual property and legal terms on their own. Also ask whether the sponsor has a binding duty to provide support if the investment struggles. Reputation and a voluntary willingness to help are different from a funded contractual obligation.
Treat it as an assumption to test. Find the time period, calculation base, and cash sources behind it. Ask what happens after debt payments change or major repairs begin. A target is not a guaranteed payment, and cash distributed during a year does not show whether the investment gained or lost value overall.
No. Less debt may reduce some financing pressure, but tenants can still leave, expenses can rise, and property values can fall. Check the value used to calculate LTV and the loan's other terms. An all-cash property can still lose money, and its owners may still be unable to sell their interests when they wish.
Review the portfolio as a whole and understand the largest individual exposures. Ask for property-level income, debt, condition, and lease information so weak assets do not disappear in averages. Study common risks across locations, such as one tenant or the same industry. A higher property count alone does not prove that risks are spread evenly.
Passing can be reasonable when a material question remains unanswered, the documents conflict, or the risk does not fit your needs. You do not need to prove that an offering is bad for everyone. You need enough reliable information to decide whether it belongs in your plan. Keep that decision separate from pressure to finish an exchange.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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