1031 Exchange Blog

In a recent post, I wrote about why sponsor selection matters when reviewing Delaware Statutory Trusts.

Sponsor selection is important, but it is only one layer of the review.

The next layer is the real estate itself.

A DST is still a real estate investment. Investors are purchasing a beneficial interest in a trust that owns real estate or other 1031-eligible property. That means the underlying property, market, tenant base, debt, reserves, fees, and exit strategy all matter.

In many cases, DSTs are designed as medium-term investments, often with anticipated hold periods in the five-to-seven-year range. Because investors do not have control over management decisions, it is especially important to understand the asset before investing.

Start With the Real Estate

When reviewing the underlying investment, investors should ask:

• What type of property is it?
• Where is it located?
• What is the occupancy?
• Who are the tenants?
• How long are the leases?
• How much debt is used?
• Are reserves adequate?
• Are the rent growth and exit assumptions realistic?
• How does the investment fit the client’s overall exchange?

A strong sponsor matters, but even strong sponsors can offer investments that may be more or less appropriate depending on the client’s goals.

Multifamily

Multifamily is one of the most familiar asset classes for 1031 exchange investors.

The long-term need for housing can be attractive, but investors still need to evaluate the specific market and business plan.

Questions to ask include:

• Is the property stabilized?
• What is current occupancy?
• Are rent growth assumptions realistic?
• Are there concessions in the market?
• What new supply is coming nearby?
• How much debt is used?
• What are the exit assumptions?

A multifamily DST in a strong market with conservative assumptions can look very different from one relying on aggressive rent growth or a difficult exit environment.

Industrial

Industrial has been a popular asset class because of logistics, supply chain demand, warehouse needs, and e-commerce.

However, not all industrial assets are equal.

Investors should review:

• Location and access to transportation corridors
• Tenant quality
• Lease duration
• Building functionality
• Rent compared to market
• Tenant concentration
• Debt terms

A well-located industrial property with long-term tenants can be very different from an older, specialized building with limited tenant demand.

Net Lease and Essential Retail

Net lease DSTs can appeal to clients seeking more predictable income potential.

These often include tenants in necessity-based industries such as grocery, pharmacy, discount retail, auto service, healthcare-related retail, and other essential services.

For clients, the key is understanding the tenant base and lease structure.

Important questions include:

• Are tenants diversified?
• Are leases long term?
• Are there corporate guarantees?
• Are rents in line with market?
• What happens if a tenant leaves?
• Is the portfolio concentrated in one tenant, industry, or geography?

Net lease does not automatically mean low risk. Tenant quality, lease terms, and property-level fundamentals still matter.

Mineral and Oil Rights

Mineral and oil rights can also be used in certain 1031 exchange strategies and may offer higher projected income than traditional DST real estate.

However, they are very different from multifamily, industrial, or net lease real estate.

The income may be tied to commodity prices, production levels, reserve estimates, operator activity, and broader energy market conditions.

For some clients, mineral and oil rights may be appropriate as a smaller allocation within a broader 1031 strategy. For others, the volatility may not fit their goals.

The key is making sure clients understand that higher projected income usually comes with a different risk profile.

The Bottom Line

DSTs are not just line items on an inventory sheet.

They are real estate investments with real tenants, real leases, real debt, real fees, and real exit assumptions.

When reviewing DSTs, investors should not stop at the sponsor name or projected yield. They should understand the underlying real estate and how it fits their exchange goals.

For a 1031 exchange investor, the goal is not simply to identify replacement property.

The goal is to identify the right replacement property strategy.

To discuss available DST options and how they may fit your exchange goals, you can learn more about Ashley Romiti or contact GCA 1031 to schedule a consultation.