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Evaluating a Delaware Statutory Trust

Whether you are a financial advisor with a client who is interested in Delaware Statutory Trusts (DSTs) or a real estate investor looking to learn more about the benefits of DSTs, here are a few key factors/questions you should consider in order to decide if a DST is suitable for your investment needs.

First of all, every offering should have a Private Placement Memorandum (PPM). It can seem a bit intimating at first, but the PPM has important details you don’t want to overlook.

We’ll start by considering the loan specifications.

What is the overall loan to value ratio (LTV)?

As an individual investor, you'll want to ensure the LTV is suitable for your debt replacement needs. At a general level, investors will want to evaluate the LTV and the payment schedule to determine if the expected net operating income (NOI) and potential appreciation will support the loan payoff requirements and investor returns. On the other hand, some investors prefer the benefits of all-cash DSTs and prefer no debt on the property.

How much of the loan payments are interest only?

Some investors prefer to significantly pay down a mortgage amount during the loan term so that the repayment of the loan is not dependent on a stable or appreciated property value. These investors seek to earn gains from the sale of the property by having less debt to cover with the sale proceeds. Other investors prefer to make minimal payments on the interest only during the life of the DST. These investors have a priority of higher cash flow throughout the life of the DST rather than significant returns upon the sale of the property. They may also be concerned with the tax implications of reducing their overall debt obligations that would increase their earned income totals.

What is the debt-service coverage ratio (DSCR)?

While the lender likely has reasonable belief that the property will produce enough to support the loan payments, an investor may like to verify that the DSCR is at a level to where if the property were to experience a reduced NOI, it would not be at risk of foreclosure, thereby risking the investor’s share.

Next, we suggest you turn your attention to the financial reserves.

How much cash has been reserved? Because the seven deadly sins restrict DSTs from borrowing additional cash or accepting additional equity contributions, DSTs must keep a reserve of cash that can be used in the event the property requires repairs or faces unexpected expenses. An investor will likely want to determine for themselves that a reasonable amount of cash has been reserved to protect the investment.

What expenses qualify for use of the reserves?

In general, reserves are in place for use on unforeseen expenses that the property may incur. In other cases, DST properties may have been purchased with the intent that capital would be used to add value to the property. In this case, additional reserves are necessary and will be used on the front-end of the investment term. In the case of a value-add DST, you should determine if the planned property improvements have the reasonable likelihood of increasing the value of the property to justify the capital expense. You should also ask: What will happen to the reserves upon the sale of the assets? It is a good idea to confirm that all remaining reserves will be distributed to the beneficiaries once the DST disposes of its assets.

Now consider the asset and its production expectations.

Is a single property DST enough to diversify your portfolio based on the property type and location? Would a multiple asset portfolio DST be more suitable?

You’ll want to decide if the asset suits your individual diversification needs.

Can the property produce a satisfactory income to overcome the load within the expected timeframe?

You may want to look at the lease structure and rental bump schedule to verify the property’s ability to produce sufficient income.

Will the property be desirable to buyers at the end of the investment term?

You should consider the NOI growth expectations to see how the property’s future capitalization rate will appeal to future buyers.

You should always carefully examine a PPM before making any investment. We understand that each investor will have different priorities that will affect how they evaluate an investment offering. We hope these questions will provide a starting point for you to make an informed investment decision. Also, know our team of experienced representatives at 1031 Crowdfunding are available to help you understand these key factors and find the DST that best meets your needs.

While the information provided above has been researched and is thought to be reasonable and accurate, it's important to understand that all investments, including real estate, are speculative in nature and involve substantial risk of loss. Additionally, private placements of securities are not publicly traded, are subject to holding period requirements, and are intended only for accredited investors who do not require a liquid investment.

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 are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and 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.