In this second part of our series on evaluating a DST sponsor, we look at two financial aspects: the sponsor’s financial strength and the type of financing the sponsor uses when acquiring properties.
If last-year results are any indication, the Delaware Statutory Trust market appears to have fully come of age. According to Mountain Dell, a research firm that tracks the 1031 exchange industry, 2021 saw explosive growth in securitized 1031 exchanges with 42 active sponsors raising $7.4 billion in equity in 265 offerings.1 The capital raise was more than twice the volume of 2020.
Yet, with more sponsors entering the market with new offerings, it becomes increasingly important to evaluate and confirm the DST sponsor has the financial strength to properly execute its acquisition and management of the property in the trust. Look for a sponsor with skin in the game and that co-invests alongside the DST investors.
Also, ensure the sponsor has the necessary strength in its balance sheet to acquire the DST property before offering it to investors. This helps minimize the risk that the trust would not raise enough capital from investors to close on property acquisition.
Often, sponsors will secure financing when acquiring properties, especially if the terms are favorable and could enhance investor potential returns. It’s essential to evaluate the type of financing a sponsor uses. Since the life cycle of a typical DST is often six years or longer, it’s not uncommon for sponsors to secure permanent 10-year financing. But you should ensure the loan secured for the DST property does not have a pre-payment penalty should the sponsor execute an exit strategy on the DST before the 10-year term.
Also, a DST sponsor might secure shorter-term financing with the intent to exit the DST in just a few years. But this should be a red flag. For example, a sponsor that uses 42-month interest-only financing could put investors at risk should the sponsor not be able to liquidate the property before the loan is due. IRS rules prohibit a sponsor from refinancing property once the offering is closed. Our team at Bangerter Financial Services pays close attention to DST financing structures to help ensure our clients aren’t exposed to undue risk.
We hope this post has helped highlight the importance of evaluating a sponsor’s financial strength and approach to property financing. In our next discussion, we will discuss why you should look at how sponsors select the property types they choose to own.
Also, for a handy reference tool on the topic, download your FREE copy of our checklist, Six Qualities Your DST Sponsor Must Have.
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Past performance is not indicative of future results.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Investment advisory services offered through Bangerter Financial Services, Inc. A state Registered Investment Advisor. Registered Representative and securities offered through Concorde Investment Services, Inc. (CIS), member FINRA/SIPC. Bangerter Financial Services, Inc. is independent of CIS.