Delaware Statutory Trust Risks: What Can Go Wrong in a DST

Key takeaways

• A DST is not a safe investment in the sense of having no risk. You can lose part or all of your money, and distributions are not guaranteed.
• The biggest risk most people underrate is illiquidity. There is no public market for DST interests, and you should plan to hold for the full term or longer.
• Debt raises the stakes. A loan magnifies losses, can trap cash when income dips, and comes due on a date the trust cannot change.
• A DST cannot raise new money after it closes. The reserve set aside at the start is often the only cushion for repairs and vacancy.
• Tenant, sponsor and tax risks each have a specific place in the offering documents. You can check every one of them before you invest.
• In my offering records as of October 2026, 36 of 76 offerings (47%) are all-cash and 16 (21%) have loan-to-value above 50%. Debt level is one of the clearest risk signals you can compare.

Are DST investments safe?

No investment is safe in the sense of carrying no risk, and DSTs are no exception. I'd rather say that plainly at the top than bury it at the end.

A Delaware Statutory Trust, or DST, is a trust that owns real estate. Many investors each buy a slice of it, called a beneficial interest. A properly structured DST interest can qualify as replacement property in a 1031 exchange, which is why most people buy one. A 1031 exchange is the tax rule that lets you sell investment real estate and defer capital gains tax by buying other real estate. If you want the full background first, start with my complete guide to Delaware Statutory Trusts.

A DST interest is also a security. It is sold privately, under a private placement memorandum (PPM), mostly to accredited investors. An accredited investor is someone who meets SEC income or net worth tests.

The question "are DST investments safe?" really contains three different questions:

1. Can I lose money? Yes. The property can fall in value, and with debt you can lose your entire investment.
2. Is my income steady? Not necessarily. Distributions depend on the property's income and can be cut or stopped.
3. Can I get out when I want? Usually not. You should expect to stay in until the sponsor sells.

That doesn't make DSTs a bad tool. It makes them a specific tool with specific trade-offs. The rest of this guide walks through each risk, shows where it hides in the documents, and explains how I size it up.

What "risk" means in this guide

Risk, for our purposes, means the chance that what actually happens is worse than what you expected. In a DST, that can show up in three ways. You might get less income than projected. You might get back less money than you put in. Or you might get your money back much later than you planned.

Each risk below hits one or more of those three. It helps to keep asking: which of the three does this one threaten?

What are the main risks of a Delaware statutory trust?

Here is the full map in one table. I'll go through each row in its own section.

Notice that every row has a place in the PPM. That's the good news. DST risks are not hidden in the sense of being secret. They're hidden in the sense of being on page 40 of a 200-page document. My guide on how to read a DST offering walks through that document section by section.

Why can't I get my money out of a DST?

Because there is no buyer standing by. This is the risk I put first, because it shapes every other one.

When you own a stock, you can sell it in seconds on an exchange. When you own a rental house, you can list it and sell it in a few months. A DST interest has neither path.

There's no public market

DST interests don't trade on any exchange. The trust has no redemption feature, so it won't buy your interest back. The trust agreement also usually requires the sponsor's consent before you can transfer your interest to anyone.

The SEC's investor bulletin on private placements explains that most securities bought in a private placement are restricted. It says "you should be prepared to hold the securities indefinitely." I take that sentence at face value.

The secondary market is small

A secondary market means buyers and sellers trading interests after the original offering. For DSTs, that market exists, but it is small and informal. A handful of firms try to match sellers with buyers.

Buyers in that market know the seller usually needs cash. They also know they're taking on a deal they didn't pick. So they generally expect a discount to what the interest might be worth at a normal sale.

The process itself takes time. Most trust agreements require the sponsor's consent before any transfer, and some charge a transfer or administrative fee. Between finding a buyer, getting consent and completing the paperwork, a sale can take weeks to months. Read the transfer section of the trust agreement before you invest, so you know the steps if you ever need them.

The regulator now called FINRA described a similar problem with the older tenant-in-common (TIC) structure. In Notice to Members 05-18, it said "TIC interests are illiquid securities." It also warned that a later sale "may only be possible at a significant discount." DSTs replaced TICs as the main fractional 1031 structure, but the liquidity problem came along.

The hold can run longer than projected

The PPM gives a projected hold period, such as 7 or 10 years. That is a plan, not a promise. The sponsor decides when to sell, and the market decides whether a sale makes sense.

If values are down when the planned sale date arrives, the sponsor may wait. That's often the right call for investors. But it means your money stays put for longer than you planned.

A hypothetical: needing cash in year four

This is a made-up example. It doesn't represent any offering or any real investor.

Say you put $500,000 into a DST in your 1031 exchange. In year four, a family need comes up, and you want $300,000. Here's what you face:

• The sponsor isn't planning to sell until year 10.
• The trust can't buy back your interest.
• You find a secondary buyer, who offers $400,000, but only for your whole interest. To get the cash you need, you'd have to take a discount and sell all of it.
• Selling also triggers the tax you deferred, because you're cashing out rather than exchanging.

The lesson is simple. Before you invest, picture the worst year you could have over the next decade. Would you need this money in it? If the honest answer is "maybe," put less into DSTs.

How I think about illiquidity

A sound rule is to invest only money you could leave in place for ten years or longer without strain. It also helps to keep a separate cash reserve outside the exchange. That way, a surprise expense doesn't force a discount sale.

Your interest can pass to heirs at death, and it can usually be moved into a living trust. What's hard is getting cash out on your own timeline.

What happens if a DST tenant leaves or stops paying?

Rent is the engine of every DST. If it slows down, distributions usually slow down first. How badly depends on the type of property and the lease structure.

Single-tenant DSTs: one tenant, all the risk

Many DSTs own one building leased to one company. Think of a distribution warehouse, a pharmacy or a medical clinic. Often it's a net lease, meaning the tenant pays the property taxes, insurance and upkeep on top of rent.

That's simple to own while the tenant pays. But everything rides on one company's credit. If that tenant files for bankruptcy, rent can stop. Under 11 U.S.C. § 365, the bankruptcy trustee, "subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." In a Chapter 11 reorganization, the tenant's own management usually holds that power. In plain terms, a bankrupt tenant can often walk away from a lease it no longer wants. The building may then sit empty until a new tenant is found.

The lease-term trap

Here's a key check for any single-tenant DST. Compare the lease's remaining term with the projected hold.

Say the lease ends in year 8, and the sponsor plans to hold for 10 years. Then the property will face a lease renewal during the hold. That matters because of how DSTs work.

Under IRS Revenue Ruling 2004-86, the trustee may not "enter into leases with tenants other than Z, except in the case of Z's bankruptcy or insolvency." Z is the original tenant in the ruling. In plain terms, a DST generally can't sign a new lease with a new tenant when the old one simply leaves. It can't renegotiate the existing lease either.

So if a lease ends inside the hold, the sponsor usually has to sell before that date or convert the trust into an LLC that can sign a new lease. I explain that conversion, called a springing LLC, in my main DST guide. It can protect the property, but it can also end your ability to do another 1031 exchange with that interest.

Multi-tenant DSTs: spread out, but still exposed

Apartments, self-storage and multi-tenant industrial DSTs have many tenants. One tenant leaving barely matters. What matters is vacancy, the share of space that's empty, and the rent new tenants will pay.

These DSTs usually use a master lease. The trust leases the whole property to a master tenant, usually a sponsor affiliate, which then signs all the individual leases. The master tenant pays the trust rent.

A master lease can smooth out the trust's rent while the property does well. The risk shows up in a bad year. If the property's income falls short of the master lease rent, the master tenant generally has to cover the gap from its own capital. When that capital runs low, the trust's rent, and your distributions, can fall with it.

A hypothetical: one tenant, two lease lengths

These numbers are made up and rounded. They don't represent any offering.

Two DSTs each own a $15,000,000 single-tenant building. Each tenant pays $975,000 a year in rent, and neither DST uses debt. Each plans a 10-year hold.

DST B isn't automatically worse. Its price might reflect the short lease. But its risk is very different, and the PPM tells you which one you're buying.

What to check

• Tenant credit. Is the tenant a large company with published financials, or a small private operator?
• Lease term left vs. projected hold. Does the lease end before the sponsor plans to sell?
• Who pays what. In a net lease, the tenant pays most costs. In a gross lease, the landlord does, and rising costs hit the trust.
• Master tenant capital. How much money does the master tenant actually have, and in what form?
• Market rent. Is the current rent above what a new tenant would pay? If so, a renewal could mean a rent cut.

How does debt make a DST riskier?

Debt is easy to misjudge in both directions. Some fear all debt. Others chase a higher projected distribution without asking where it comes from. I cover loans in depth in my guide to DST debt and leverage. Here I'll focus on what can go wrong.

Loan-to-value, or LTV, is the loan amount divided by the property's value. A 50% LTV means half the price was borrowed. The loan sits at the trust level, and it's generally non-recourse to investors. Non-recourse means the lender can take the property if the loan goes bad, but generally can't pursue your personal assets.

Debt magnifies losses

Debt cuts both ways on your equity. When values rise, leverage boosts your gain. When values fall, it deepens your loss. The loan gets repaid first, and equity investors get what's left.

A worked example: one property, three debt levels

This is a hypothetical with simple numbers. It ignores selling costs, fees and loan paydown so the effect of debt is easy to see.

Say a DST buys a $20,000,000 apartment property. Years later, it sells for $17,000,000, a 15% drop.

The same 15% drop in value costs the all-cash investors 15%. It costs the 65% LTV investors about 43%. If the price fell to $13,000,000, the 65% LTV investors would get nothing back at all.

Cash can get trapped even without a default

Most DST loans include cash management rules. Rents flow into an account the lender controls. If income falls below a set test, the lender holds back extra cash as a reserve instead of letting it go to investors.

The common test is the debt service coverage ratio, or DSCR. That's the property's net operating income divided by its loan payments. Net operating income, or NOI, is rent minus operating costs, before the loan.

A hypothetical: a cash sweep

Made-up numbers again. Say a DST has a $13,000,000 interest-only loan at 5%, so interest is $650,000 a year. NOI is $1,200,000. DSCR is $1,200,000 ÷ $650,000 = about 1.85x.

Now say insurance and property taxes jump, and a softer rental market trims rents. NOI drops 25% to $900,000. DSCR falls to about 1.38x.

If the loan's cash management trigger is 1.40x, the lender can start sweeping excess cash into a reserve. Distributions to investors could stop, even though the loan isn't in default and the building is mostly full. That's one way distributions can stop in a leveraged DST.

Interest rate risk

Interest rates touch a DST in three ways.

1. Floating-rate loans. Some DSTs use loans whose rate moves with the market. Many buy a rate cap, a contract that limits how high the rate can go for a period. When the cap expires, replacing it can be costly.
2. Loan maturity. A DST can't refinance under Rev. Rul. 2004-86, which says the trustee "may not renegotiate the terms of the debt." So the loan's maturity date is a hard deadline. If the market is weak then, the choices narrow to a sale, an extension the documents allow, or a springing LLC conversion.
3. Property values. Higher rates generally push buyers to pay less for the same income. That can lower the sale price at the end, even for an all-cash DST.

I check the loan's maturity against the projected hold on every leveraged offering. I like to see a cushion of a few years between the planned sale and the maturity date.

Debt also has a purpose

None of this means debt is bad. In a 1031 exchange, your share of a DST's loan generally counts toward the debt you need to replace (or offset with added cash). Without it, you might fall short and owe tax on the difference. The IRS's like-kind exchange fact sheet notes that receiving "cash, relief from debt, or property that is not like-kind" can trigger taxable gain.

The goal isn't zero debt. It's the right amount of debt for your exchange, on terms the property can carry through a bad year.

What is sponsor risk in a DST?

The sponsor is the real estate company that puts the deal together and runs it. Its affiliates usually act as the signatory trustee, the asset manager and, in many deals, the master tenant. The sponsor or an affiliate also often signs the loan's carve-out guaranty. That's a promise to the lender that makes the guarantor liable if certain bad acts occur, like fraud.

So the sponsor's skill, finances and honesty affect your result at nearly every step. Sponsor risk comes in a few forms:

• Skill risk. The sponsor may misjudge the market, overpay or run the property poorly.
• Financial risk. A weak sponsor may not be able to support a struggling master tenant or replace a guarantor.
• Conflict risk. The sponsor earns fees from the deal, and its affiliates sit on both sides of several contracts. Their interests won't always match yours.
• Continuity risk. Key people can leave, or the company can be sold.

In a properly built DST, the trust owns the property, not the sponsor. So a sponsor's failure doesn't automatically wipe out your interest. But it can disrupt management, trigger loan defaults and cut distributions. I wrote a full guide on what happens if a DST sponsor goes bankrupt, so I won't repeat it here.

In Notice 05-18, about the older TIC structure, FINRA said it is "not appropriate" for firms recommending a TIC "simply to rely on representations made by the sponsor in an offering document." It suggested steps like "background checks of the sponsor's principals." I think that standard is a good one for investors too.

Why do DST reserves matter so much?

Because a DST can't go back to investors for more money. Rev. Rul. 2004-86 says the trustee may not "accept additional contributions of assets (including money)." So whatever cash the trust has at closing, plus what the property earns, is all it will ever have.

A reserve is money set aside from the offering for future needs. It usually covers repairs, capital improvements, leasing costs and short-term shortfalls. Capital expenditures, or capex, are big-ticket spending on the building itself, like roofs, parking lots and HVAC systems.

What a thin reserve looks like

A reserve should match the property's real needs. A newer building with a long net lease may need little. An older apartment community may need a lot. The PPM usually includes or summarizes a property condition report, which lists expected repairs and costs. Compare that report with the reserve.

A hypothetical: a reserve shortfall

These numbers are made up and don't represent any offering.

Say a DST buys a 200-unit apartment community built in the 1990s. The sponsor sets aside a $1,000,000 reserve, or $5,000 per unit. That sounds healthy.

Now say the roofs need replacing in year five, at a cost of $1,600,000. Other repairs have already used $300,000 of the reserve.

• Reserve left: $1,000,000 − $300,000 = $700,000
• Roof cost: $1,600,000
• Shortfall: $1,600,000 − $700,000 = $900,000

The trust can't raise $900,000 from investors. So what happens? There are a few paths, none of them painless:

1. Cut distributions. Hold back cash flow until the roofs are paid for. If the property throws off $1,100,000 a year after costs, that could mean most of a year with little or no income for investors.
2. The master tenant pays. Some master leases make the master tenant responsible for certain repairs. That works only if the master tenant has the money.
3. The sponsor lends money. Some sponsors advance funds. Read the terms, because those advances may get repaid ahead of your distributions.
4. Convert to a springing LLC. The LLC can raise new capital or borrow. New money may come in ahead of yours.

That's why I read the reserve and the property condition report side by side. A round number that looks generous doesn't impress me on its own.

Why is a DST's rigid structure a risk?

The same rules that make a DST work for taxes also make it inflexible. In industry shorthand, these are the "seven deadly sins": no new capital, no new or changed debt, no reinvesting sale proceeds, only limited improvements, cash held only in short-term investments, all available cash paid out, and no new or changed leases. My main DST guide explains each one.

The risk is that real buildings need things the trust isn't allowed to do. A loan comes due in a bad year. A big tenant leaves. A major repair can't wait.

When that happens, most trust agreements let the signatory trustee convert the trust into an LLC. That's the springing LLC. It solves the flexibility problem, but it changes what you own. An LLC interest is generally taxed as a partnership. A partnership interest isn't real property under Section 1031, so you may lose the ability to do your own exchange when the property sells.

Before you invest, find out who can trigger a conversion and what investors get to say about it.

When the exit is a 721 into a REIT

Some DSTs are set up so a real estate investment trust (REIT) can later take over the property. The REIT's operating partnership, often affiliated with the sponsor, acquires the property in exchange for operating partnership units, or OP units. This is called a 721 exchange, and I explain it in my 721 exchange guide.

The exit can be optional or mandatory. If it's mandatory and the REIT acts, your DST interest converts. Once you hold OP units, you generally can't do another 1031 exchange with that money. Converting units to REIT shares or cash is generally taxable. Your money also ends up concentrated in one REIT, and your ability to cash out depends on that REIT's redemption terms.

In my offering records as of October 2026, 13 offerings (17%) make the 721 exit mandatory and 44 (58%) make it optional. Ask your CPA how a conversion would affect you before you invest.

What tax risks come with a DST?

Most people buy a DST to defer tax. So the tax risks deserve their own list. This isn't tax advice, and your CPA should review your own situation.

• Your exchange fails. Under Section 1031, you generally must identify replacement property within 45 days and close within 180 days (or by your tax return due date, with extensions, if that comes first). The IRS fact sheet says these limits "cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters." If an offering fills up before you close, you need a backup.
• Your qualified intermediary fails. A qualified intermediary, or QI, holds your sale money during the exchange. The same IRS fact sheet warns of "intermediaries declaring bankruptcy." Choose yours with care.
• The structure fails. If a trust doesn't follow Rev. Rul. 2004-86, it might not be treated as real estate for tax purposes. Sponsors get legal opinions on this, but an opinion isn't a ruling.
• Foreclosure creates a tax bill without cash. IRS Publication 4681 says that after a foreclosure "you are treated as having sold the property" and "you may recognize taxable gain." With non-recourse debt, the amount realized "includes the entire unpaid amount of the debt." If your basis is low from years of deferral, you can owe tax with no cash coming back.
• A springing LLC ends your exchange chain. As described above, a conversion can mean no 1031 exchange when the property sells.
• State filings. You may need to file returns in each state where the trust owns property.
• The law changes. Section 1031 and the step-up in basis at death are current law. Congress can change either one.

Have Delaware statutory trusts failed?

Yes, some have. I think you should hear that from me plainly.

Over the years, some DSTs and earlier fractional programs have cut or stopped distributions. Some have sold for less than investors put in. Some have converted to LLCs to deal with a loan or a vacancy. Some have lost their properties to lenders. Sponsors of fractional real estate have run into financial trouble, too.

I'm not going to name specific companies or programs here. The facts in each case differ, and a one-line summary would be unfair to everyone involved.

Risks rarely do the most damage alone. When two or three land together, a deal has much less room to recover. Combinations to watch for:

• High leverage plus a loan maturing in a weak market.
• A single tenant leaving with little lease term left, plus a thin reserve.
• A master tenant with little capital, plus falling rents.
• A sponsor stretched across too many deals when the market turns.

Most of those combinations are visible in the PPM before you invest. That's the reason I spend so much time on the documents.

What "full-cycle" outcomes tell you

A full-cycle investment is one that has been bought, held and sold. Only then do you know what actually happened. Projections tell you what a sponsor hoped for. Full-cycle results tell you what came true.

When I look at a sponsor's history, I care most about the deals that went badly. How did the sponsor communicate? Did it protect investors' interests or its own fees? Did it hold through a bad market or sell into it? My guide to DST full-cycle results and exits covers how to read those outcomes.

What are the common problems with Delaware statutory trusts?

People search for "problems with Delaware statutory trusts" for a reason. Beyond the big risks above, here are practical frustrations to plan for.

Fees reduce what goes into real estate

A DST carries more costs than buying a building yourself. Most of them come out of your money at the start. They include selling commissions, offering costs, the sponsor's acquisition fee and financing fees. Ongoing asset management fees and a fee at sale often follow.

FINRA's Notice 05-18 put the issue clearly for the older TIC structure: "As fees charged in connection with a TIC exchange increase, the money saved as a consequence of tax deferral will be offset." The same logic applies to DSTs. Fees aren't a reason to avoid DSTs on their own. But compare them across offerings. My guide to DST fees and returns breaks down each fee and what it does to your return.

Concentration in one property

A single-asset DST puts your result on one building, in one market, often with one tenant. In its notice on the older TIC structure, FINRA also warned that "concentration of an investor's assets in a single asset class" is "not suitable for many investors." Putting most of your net worth into real estate, through one DST or several, raises that same issue. The SEC's guide to asset allocation and diversification puts it simply: "don't put all your eggs in one basket." My guide on how many DSTs you should own goes into splitting an exchange.

Limited control

You have no say in daily management. You usually have no vote on when to sell, how to lease or whether to convert. That's what makes a DST passive, and it's also what makes it frustrating when you disagree with the sponsor.

Distributions aren't the same as profit

A distribution is cash paid to you. It isn't necessarily profit. Early distributions can be partly funded from reserves, or reflect a master lease that later resets. Ask where the cash is coming from.

Paperwork and timing

The sponsor sends an annual tax statement, and it can arrive later than your other tax forms. You may owe returns in other states. None of this is a deal-breaker, but plan for it.

Fraud risk

Any private investment can attract bad actors. The SEC's bulletin notes that "Form D does not represent SEC approval or registration." Work with a registered representative, and look them up on FINRA BrokerCheck.

DST risk vs. owning a rental vs. a REIT

Every option has risks. They're just different ones. Here's how DST risks compare with two common alternatives. These are general features, and every deal is different.

The pattern is clear. A DST removes the work and the personal loan liability of owning a rental. In exchange, it adds illiquidity, rigidity and reliance on a sponsor.

How to evaluate DST risk, step by step

Here's the process I use and recommend. You can do most of it yourself with the PPM in hand.

Step 1: Decide how much you can lock up

Before you look at any offering, decide how much of your exchange you could leave untouched for ten years or more. Keep a cash cushion outside the exchange for surprises.

Step 2: Read the risk factors first

Open the PPM to the risk factors section and read it before the marketing pages. Mark any risk specific to this property, not just the standard language. My guide on how to read a DST offering explains how to tell the two apart.

Step 3: Check the debt

Find the LTV, the interest rate, whether it's fixed or floating, and the maturity date. Compare the maturity with the projected hold. Find the DSCR level that triggers cash management.

Step 4: Check the tenants and leases

For a single tenant, compare the lease term left with the projected hold. Look up the tenant's credit. For multi-tenant property, look at current vacancy and the rent assumptions.

Step 5: Check the master tenant

If there's a master lease, find out how the master tenant is capitalized. Is its capital cash or a note from the sponsor? How much is it?

Step 6: Compare the reserve with the building

Find the reserve in the use-of-proceeds table. Compare it with the property condition report. Ask what happens if the reserve runs out.

Step 7: Look hard at the sponsor

Read the sponsor's track record, including its full-cycle results and any deals that went badly. Ask about the guarantor's net worth and liquidity.

Step 8: Read the exit terms

Find the projected hold, any 721 exit into a REIT, and the springing LLC rules. Know who can trigger each one.

Step 9: Stress-test the numbers

Ask what happens if rents come in 10% lower than projected, or the sale price is 15% lower. Run the debt example above with the offering's real LTV.

Step 10: Spread your exposure

Consider splitting your exchange across more than one DST, property type and sponsor, within the identification rules. Then have your CPA and attorney review the plan.

Mistakes to avoid with DST risk

Most of these are easy to avoid with a little planning.

1. Treating projections as promises. A projected distribution rate is a sponsor's estimate. It's not guaranteed, and it can be cut.
2. Chasing the highest projected distribution. A high rate can mean more debt, a weaker tenant or a thinner reserve. Ask why it's high.
3. Ignoring the loan maturity. A loan that comes due near the planned sale leaves no room if the market is soft.
4. Skipping the lease-term check. A single-tenant lease that ends during the hold is a different investment from one that runs past it.
5. Trusting the master lease too much. It's only as strong as the money behind the master tenant.
6. Assuming the reserve is enough. Compare it with the building's actual needs.
7. Putting your whole exchange in one deal. One building, one tenant and one sponsor is a lot of concentration.
8. Investing money you might need. Illiquidity is the risk that bites at the worst time.
9. Forgetting the tax side. A foreclosure or a springing LLC conversion can change your tax picture. Ask your CPA before you invest.
10. Leaving no backup in your exchange. An offering can fill up before you close. Consider identifying a second option within your 45-day window.

How I weigh risk before I show you an offering

I studied applied mathematics and applied statistics at Babson College, and my background includes years in real estate acquisitions, management and development.

My team and I run the same five-area review on every DST, with outside auditors in each area. Here's which risks in this guide each area looks at:

A review can't remove these risks. It helps me decide which offerings to show you and what to point out.

I offer DSTs from more than 20 institutional sponsors and track more than 1,100 full-cycle 1031 DST investments for performance. This is an ongoing review, not a one-time check.

When we talk, I'll walk you through the offerings I currently have available. I'll tell you why I'm considering each one, what I like and where I have reservations. The reservations are the part I'd ask you to listen to most closely.

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

What my data shows

Risk is easier to judge when you can see the whole market. Here is what my offering records as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They are not a forecast or a promise about any future offering.

Debt levels vary widely

For this topic, leverage is the number I'd put first. 36 of 76 offerings (47%) are all-cash, with no loan at all. At the other end, 16 offerings (21%) have loan-to-value above 50%.

That spread matters for everything in the debt section above. In an all-cash DST, there's no lender to sweep cash and no maturity date to beat. In a DST above 50% LTV, a modest drop in value takes a much bigger bite out of your equity. Neither is right for everyone. It depends on the debt you need to replace and how much risk you can carry.

Projected distributions span a wide range

Among the 71 offerings that published a projected year-one distribution rate, the median was 4.7%, with a range of 4.0% to 9.0%. These are projections, not results. They are not guaranteed, and actual distributions can be lower or stop.

From a risk point of view, a projected rate near the top of that range is a prompt to check three things: leverage, the lease term left and the size of the reserve. A higher rate can also reflect the property type, such as an energy royalty program, which carries commodity-price risk.

Property types and locations

Multifamily is the largest group, at 41%. Those deals usually rely on a master lease, so master tenant capital is worth a close look. The offerings span 33 states, most often Florida (14), Texas (13), North Carolina (8) and Georgia (7). If your current holdings are already in one of those states, that's worth knowing when you think about concentration.

Hold periods and exits

A 10-year projected hold is the most common, at 31 offerings. Others project 5 to 10 years or 7 years, and a few are 2-year programs. Plan for the full projected hold, and for the chance it runs longer.

On exits, 44 offerings (58%) have an optional 721 exit into a REIT, 13 (17%) make it mandatory, 17 (22%) have none, and 2 are unclear. A mandatory 721 exit ends your ability to keep doing 1031 exchanges with that money, which is a risk of its own.

Offerings I reviewed and passed on

Of the 76 offerings, 16 are open, 6 have limited availability, 24 are under review, 25 are closed, and 5 are ones I reviewed and passed on. Those five are there on purpose. Every offering goes through the same five-area review, and passing is one possible result.

Frequently asked questions

Are DST investments safe?

No investment is free of risk, and DSTs carry real ones. You can lose part or all of your money, distributions are not guaranteed, and you usually can't sell until the sponsor does. A DST can fit some investors well, but only if they understand and accept those risks.

What is the biggest risk of a Delaware statutory trust?

For most investors, it's illiquidity. There's no public market, the trust won't buy your interest back, and the hold can run longer than projected. Debt and tenant risk come next, depending on the deal.

Can I lose all my money in a DST?

Yes. If the property's value falls far enough, especially with a large loan, investors can lose their entire investment. A foreclosure can also create a tax bill even when no cash comes back to you.

Can I sell my DST interest early?

Sometimes, but rarely on good terms. The trust has no redemption feature, transfers usually need sponsor consent, and buyers in the small secondary market generally expect a discount. Plan to hold for the full term.

What happens if the tenant in my DST goes bankrupt?

Rent can stop, and the lease may be rejected in the tenant's bankruptcy. Rev. Rul. 2004-86 allows a DST to lease to a new tenant in that case. But re-leasing takes time and money, and distributions can drop until a new tenant is paying.

How does interest rate risk affect a DST?

A DST can't refinance, so its loan maturity is a hard deadline. Floating-rate loans can cost more when rates rise, and higher rates can lower sale prices. All-cash DSTs avoid the loan issues but still feel the effect on property values.

Why can't a DST raise more money for repairs?

The IRS ruling that makes DSTs work for 1031 exchanges bars the trust from accepting new contributions. So the reserve set aside at closing, plus property income, has to cover repairs. If that's not enough, distributions may be cut or the trust may convert to an LLC.

Have any DSTs failed?

Yes. Some DSTs have cut distributions, sold at a loss, converted to LLCs or lost properties to lenders. The most serious trouble tends to come when two or three risks land at once, like high debt and a loan maturing in a weak market.

Is an all-cash DST less risky?

It removes the loan risks: no cash sweeps, no maturity deadline and no magnified losses. It still carries tenant, market, sponsor and illiquidity risk. It also may not replace the debt you paid off in your exchange, so check with your CPA.

How can I reduce the risks of investing in a DST?

Read the PPM's risk factors, check the debt, lease terms, reserve and sponsor, and invest only money you can leave alone for years. Consider splitting your exchange across several DSTs and sponsors. Have your CPA and attorney review the plan before you commit.

Before you act

This guide is for education only. It isn't tax, legal or investment advice. Please confirm every decision with your CPA, attorney and qualified intermediary. DST interests are offered only by private placement memorandum, most only to accredited investors. DSTs are illiquid, offer limited control, distributions are not guaranteed, and you can lose your entire investment.

Sources

• IRS Revenue Ruling 2004-86
• 26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)
• IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Code Section 1031
• 11 U.S.C. § 365, Executory contracts and unexpired leases (Cornell LII)
• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
• FINRA (NASD) Notice to Members 05-18
• Investor.gov, Private Placements under Regulation D, Investor Bulletin
• Investor.gov, Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
• FINRA BrokerCheck