How to Evaluate Potential DST Properties: Key Metrics to Consider and Questions to Ask

Delaware Statutory Trusts (DSTs) offer a compelling entry into high-quality commercial real estate—especially for those executing 1031 exchanges. However, given the pre-packaged nature of DST offerings, due diligence is essential. This blog breaks down the essential criteria and expert questions every investor should consider when evaluating potential DST properties.

What to Look for in a DST Offering

1. Review the Offering Documentation (PPM) Thoroughly

The Private Placement Memorandum (PPM) is your primary window into the investment’s structure, risk, and revenue expectations. Though dense, it contains must-know details about the sponsor, financials, property specifics, and legal terms. Skipping or skimming this document is a red flag.

2. Sponsor Track Record Matters

Know who’s behind the offering. A trustworthy sponsor should have:

• A demonstrable track record—successful DSTs across various real estate cycles.

• Specialization in the sector (e.g., multifamily, industrial).

• A reputation for transparent communication throughout the offering’s lifecycle.

3. Scrutinize Financial Projections for Realism

Projected cash flow, rent growth, and occupancy are often optimistic. Validate assumptions by comparing them against:

• Third-party appraisals or market comps.

• Local market reports or economics to ensure projections are grounded in current trends.
  

4. Understand the Fee Structure

DSTs are notorious for high fees. Typically, you'll encounter:

• Acquisition fees

• Asset-management fees

• Disposition or exit fees
  Assess whether these costs are reasonable—or if they significantly dilute your returns.
  

Additional Due Diligence Considerations from Industry Experts

Location, Tenant Quality & Lease Terms

• Examine property class and market fundamentals.

• Look for long-term leases with creditworthy tenants, especially in recession-resistant sectors.

Exit Strategy & Liquidity Profile

• Clarify how and when the DST intends to exit (sale, refinance, etc.).

• Given DSTs are illiquid, understanding the exit timeline and the sponsor’s ability to execute is critical.

Exit Scenario Awareness

DST exits vary widely—from strategic sales and refinancing to distressed dispositions. Each path carries different financial and tax outcomes:

• A strategic sale may maximize value when markets align.

• A refinancing may return capital sooner while retaining asset exposure.

• Distressed sales can significantly undercut returns.
  Understand and evaluate each scenario as part of your due diligence.
  
  

Final Thoughts

General Disclosure