Real estate investing remains a popular strategy for building wealth and achieving long-term financial goals. Delaware Statutory Trusts (DSTs) have become a preferred option for many investors, offering the potential to defer capital gains taxes by qualifying as a replacement property in a 1031 exchange. In 2024, DST offerings raised more than $5.66 billion in equity, a 12% increase from 2023.
Although DSTs could offer great value to investors, they also have many risks that threaten their return—the biggest being fees charged by trusts.
Experienced investors know how to look at DST fees and fee components to find the true value of a DST investment and not be misled by the promise of high returns.
This guide is tailored to educate investors on the fees, costs, and financial considerations of DSTs. Our goal is to help you assess the true cost structure of a DST investment, so you’re prepared to make informed decisions that align with your investment goals.
Key Advantages and Risks of DSTs
Delaware Statutory Trusts (DSTs) are a popular investment option for investors interested in income-producing real estate without the burdens of property management. The main benefit of investing in a DST is that you can get direct ownership of institutional-quality real estate without having to acquire the properties on your own.
Moreover, you can use DSTs with 1031 exchanges to defer capital gains taxes on your DST investment that would be due if you simply cash out. And since DSTs are passive investments, the properties are managed by a professional real estate company, freeing the investor from the day-to-day responsibilities of property management.
However, like any investment, DSTs also come with certain risks. Potentially the biggest drawback of owning a DST investment is its lack of liquidity, i.e., you cannot quickly turn it into cash. Furthermore, market trends and economic conditions can impact the operational profitability model and/or value of underlying properties, affecting your returns. Additionally, DST investments come with several fees, including management fees, property acquisition fees, and other operational costs. Higher DST fees can impact your overall return on investment over time.
When choosing DST investments, it’s crucial to understand the associated fees. Having a clear grasp of these costs allows investors to make the most informed decisions, ensuring they can evaluate potential returns and align investments with their financial goals. In the following section, we’ll try to understand the various fees charged by DSTs and how they affect your investment.
Breaking Down DST Fees
DSTs can offer great value to real estate investors, but they also have fees that can impact your return.
DST fee structures are composed of five primary components:
- Acquisition Fees: This is typically a one-time fee charged when the trust initially purchases a property. The acquisition fee is paid to the manager or sponsor of the DST for identifying and acquiring the underlying property. This fee is calculated using a percentage of the total purchase price of the property.
- Asset Management Fees: This is typically an ongoing fee for ongoing operational expenses. Examples include maintenance costs, leasing, and financial reporting.
NOI = Income generated by the property – operating expenses. - Disposition Fees: When the trust disposes of or sells a property, it typically charges a fee to cover the expenses associated with the transaction. These include legal costs, insurance, and broker commissions. The disposition fee is charged as a percentage of the sale price of the DST property.
- Additional fees: Examples include fees allocated for a reserve fund for repairs, financing fees for securing loans, legal fees, and administrative costs. When inspecting an offering, it’s important to read the Private Placement Memorandum to ensure the investor identifies and understands any additional fees that may be charged.
- Selling commissions: Registered investment advisors and representatives licensed to broker DST investment sales are typically compensated through selling commissions.. These commissions are a standard part of the DST investment process and are paid by the sponsor or issuer of the DST from investment proceeds.
How DST Fees Impact Investment Returns
DST investing is a real estate investing approach that potentially facilitates accredited investors to build wealth in the real estate market. However, in order to be successful, investors should be mindful of the impact DST fees can have on their returns.
Management, operational, and one-time fees all have the potential to affect investment returns. The fees involved in investing in a DST are allocated to cover the management and operational expenses. They are deducted from the property’s net operating income (NOI)—the final amount from which income is distributed to the investors.
DST fees are not the same everywhere. They can vary depending on the sponsor and the specific offering. A DST sponsor may charge higher acquisition fees for negotiating and closing a deal but lower property management fees, whereas another might have the opposite approach. Similarly, a DST sponsor might pay high broker-dealer fees to sell a property, while another may take a more hands-on approach to reduce costs.
The impact of these costs might not be immediately visible; however, small fees can add up over time and erode your returns over a decade or more. This should be an important consideration for investors with a large investment horizon.
What to Look For When Evaluating DST Fees
When evaluating a DST investment, it’s crucial to assess not only the fee structure but also the overall value the investment offers. Key factors like the types of properties under management, their locations, and the track record of the DST sponsor all contribute to the investment’s potential. However, it’s important to recognize that DST fees can impact the income you earn, so a careful analysis is essential.
Because DSTs are long-term investments, conducting thorough due diligence at the outset is critical. Below are some recommendations to help you assess fee structures and make well-informed decisions:
- Transparency: Request a detailed breakdown of all fees, both upfront and ongoing, from the DST sponsor. Common fees to inquire about include acquisition costs, asset management fees, disposition fees, closing costs, and legal or administrative expenses. Understanding these fees provides clarity on how they might impact your returns over the long term and helps you gauge the net income you can expect.
- Comparisons: DST fees can vary significantly between trusts, giving you an opportunity to compare offerings. Don’t just focus on the total fee amount—examine individual fee components to gain deeper insight into the trust’s strategy. For example, a DST with higher disposition fees might rely on external brokers, while one with lower fees may handle sales in-house. A side-by-side comparison of fees helps you align your investment choice with your financial goals and risk tolerance.
- Long-term impact: While DSTs provide a relatively low entry point into real estate, fees like acquisition and management costs can reduce expected returns. High-quality DST properties, such as those in prime locations or with high occupancy rates (e.g., 90% or higher), may offset these costs by delivering steady income and potential appreciation over time. Carefully weigh the fee impact against the investment’s long-term income potential and growth prospects.
- Sponsor credibility: Since DSTs tie up your capital for years, evaluating the sponsor’s real estate expertise is crucial. While syndication experience matters, a sponsor with deep real estate knowledge—even if new to DSTs—can be a strong steward of your investment. Review their track record, seek investor testimonials, and compare fee structures to industry standards. Reputable sponsors should provide transparency and benchmarks to help you make an informed decision.
Navigate DST Fees with Confidence
DSTs can be valuable investment opportunities, offering potential returns when investors conduct thorough due diligence and carefully assess the associated risks. Investors can also benefit from the expertise of skilled sponsors who professionally manage the investment on their behalf.
That said, it’s important to note that many DSTs have fees that can affect the overall value of your investment and your potential returns. Taking the time to understand and evaluate the trust’s fee structure before committing your capital is a crucial step in making an informed decision.
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This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees, and other expenses. This literature must be accompanied by and read in conjunction with a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results, forward-looking statements and projections are not guaranteed to achieve the results described, and your actual returns may vary significantly. Investments in private placements are illiquid in nature, and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice, and you should consult with your tax advisor, as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.
