Due Diligence & 3rd Party Independent Review
Some investors may buy a replacement property based on a minimal amount of information. An investor might
make a purchasing decision on a multi-million dollar property before even a small amount of due diligence
can be performed. Little might be known about the building, the tenants, the lease(s), actual property
condition, past building or tenant issues, Net Cash Flow opportunities, and the potential for long term success,
which all require thorough and proper due diligence.
Due Diligence – Disclosure – DST Due Diligence Process
No Guarantee of Success
Due Diligence is required to provide potential investors with disclosures of risks and fees, and other information
to help evaluate a Delaware Statutory Trust offering before any investment is made. While the number one
goal of the Due Diligence process is to provide help to a potential investor to make an informed decision,
there is no guarantee that the due diligence process will succeed in this goal.
Even though Due Diligence is performed on a specific DST offering, the specific DST offering the due diligence
is performed on IS NOT GUARANTEED TO SUCCEED.
Due Diligence does not guarantee successful investment results, NOR DOES Due Diligence guarantee that the
Due Diligence process and/or opinions are correct. It is hoped that Due Diligence can potentially help investors
to identify investment/operational risks/issues, that should be addressed before an investment is made, and
can affect investment performance.
Delaware Statutory Trust – DST Comprehensive Due Diligence
DST real estate offerings should undergo comprehensive due diligence before they are offered to the public for
investment. We feel that no one should invest in any type of real estate property without thoughtful, unbiased,
and comprehensive due diligence. In fact, FINRA (the regulatory agency for the financial industry) requires
broker-dealers to do careful due diligence on DST Sponsors and the real estate investments they represent
prior to offering them to the public for investment (NASD Notice to Members 05-18 and 03-71).
Sponsor Due Diligence
The DST Sponsor provides written detail as to the economics — including income, expenses, net profit
and potential for appreciation. In addition, the Sponsor substantiates that the DST qualifies as a 1031
replacement property, that all disclosures, tenant information and the local real estate market, property
condition, and contingency plans for repairs and maintenance are accurate and up to date.
Broker Dealer Due Diligence
This information from the Sponsor is then reviewed by a team at the Broker Dealer. The work completed here
helps to ensure strict compliance with all applicable rules and regulations. After initial Broker Dealer approval, if
the Broker Dealer engages outside experts, the entire Due Diligence Package is sent to an independent 3rd
party analyst, in many cases a law firm specializing in securities and/or real estate law, to review the entire
3rd Party Due Diligence, Review & Opinion
We feel it is prudent to only invest in DSTs that have gone through a comprehensive review by an outside
and unbiased party. An independent 3rd party analyst, preferably a firm specializing in security transactions,
real estate transactions, and real estate laws, should be retained to thoroughly analyze the Sponsor and
the specific DST offering. The firm, in some cases a law firm, writes a comprehensive report on the property,
tenants, projections, and Sponsor, all ending in an unbiased opinion regarding the property. The opinion
can be satisfactory, confirming that the information provided by the DST sponsor is supported by fact,
seems reasonable, and is in line with industry norms, – or unsatisfactory, indicating that the information and
projections by the DST Sponsor may not be accurate, and/or do not fall in line with industry norms, and/or do
not seem reasonable, and therefore should not be relied upon.
Lender Provides Additional Due Diligence
If a loan will be placed on the DST property, the lender on the property will almost always require internal review
and due diligence in the loan underwriting process, focusing on the lender’s concerns, which include issues
of conservativeness, Sponsor experience and expertise, security, net cash flow, and the long term viability of
the project to meet debt service and projections.
Additional Due Diligence Components
Lender Reserve – In addition to performing their own due diligence as explained above, the lender may
require that funds for the project be set aside for “Lender Reserve”. The “Lender Reserve” is typically earmarked to make future debt service payments that can’t be made by the DST. This “Lender Reserve” can usually only be
used if the property does not perform according to Sponsor projections. If the unused lender reserves are
accountable (which is typically stated in the PPM), they will be returned to the DST investors.
Sponsor Reserve – Many DST investments offered to consumers include a significant amount of cash held as
“Capital Reserve” which is often invested in a separate money market account. The money is typically only used
if the property does not perform according to Sponsor projections, potentially helping to cover unanticipated
costs. If the unused capital reserves are accountable, they will be returned to the DST investors.
Sponsor Master Lease Structure – Based on the technical structure of a DST, it is our belief that most DST real
estate investments will be offered under a Master Lease Agreement. A typical DST Master Lease will provide for
a “Base Rent” guarantee from the Sponsor/Affiliate that promises to cover the debt service even if rental income
is by itself insufficient to do so. Please note that this “Base Rent” guarantee is subject to the DST Sponsor’s
financial status at the time the “Base Rent Guaranteed Payment” would be required to be made.
Comprehensive Due Diligence
Potentially Valuable Information
With the level of detail required to do comprehensive due diligence research on a property, costs of this
research can mount quickly, depending upon the number of organizations that have participated in the
due diligence process. Even though they should, many real estate investors either can’t afford to, or simply
won’t invest in this level of recommended research before they purchase their individually owned, selfmanaged
property. A DST investor receives the benefits of the due diligence research, allowing for an educated
decision regarding property reinvestment, without having to pay for these costs individually, as they are
shared proportionately by all investors.
Finalizing The Due Diligence Process
The Comprehensive Due Diligence process should be finalized by your Financial Advisor, who must be
properly licensed in the securities industry to advise you legally on DST real estate investments. Your
Financial Advisor will work with his/her own in-house team to review all the information available from the
above named sources.
You should verify that your Financial Advisor interviews the Real Estate Sponsor responsible for the DST
investment. This entire process, while tedious, is extremely important to allow your Financial Advisor to
have reasonable comfort with the Sponsor’s history of transactions, business philosophy, management team,
and their long-term business plan.
Even though the due diligence provided by other sources verifies the economic viability of the transaction
and the competence of the Sponsor, having direct communication with the management team of the DST
Sponsor from your Financial Advisor provides the final element of due diligence disclosure that you should
require. After this internal review is completed, then, and only then, should you be offered specific DST real
estate properties to invest in.