What Are DST Fees?
One of the most common questions investors ask me when reviewing a Delaware Statutory Trust is: What are the fees?
It is an important question, but the answer is not as simple as looking for one percentage in the offering documents.
A DST can have costs at acquisition, costs during the ownership period and costs when the property eventually sells.
Understanding those costs is an important part of evaluating whether the investment makes sense.
Just as important, I believe fees should be reviewed alongside the quality of the real estate, the sponsor, financing, projected income and potential exit.
A low-fee investment is not automatically a good investment, and higher fees should never be ignored simply because a projected return looks attractive.
Here is how I look at DST fees.
Where DST costs can show up
- Selling commissions
- Dealer manager fees
- Acquisition fees
- Financing fees
- Legal, organizational and offering costs
- Property management fees
- Asset management fees
- Leasing and tenant costs
- Brokerage commissions
- Closing costs
- Disposition fees
Fees and expenses vary significantly among DST offerings. Review the PPM for each offering.
What Are the Upfront Fees?
When a DST sponsor acquires a property and structures an offering, there are expenses associated with purchasing the real estate, arranging financing, creating the investment structure and distributing the offering.
Those costs can include several categories.
Selling Commissions
Many DSTs are securities offered through broker-dealers and registered representatives.
A portion of the offering proceeds may be used to compensate the broker-dealer and financial professional involved in the transaction.
Depending on the offering and share class, this may include a selling commission and other broker-dealer compensation.
Dealer Manager Fees
Some DST offerings include a dealer manager fee.
The dealer manager helps coordinate distribution of the securities through participating broker-dealers.
Acquisition Fees
Sponsors may charge an acquisition fee for identifying, negotiating and acquiring the real estate.
There is real work involved in sourcing and closing a commercial real estate transaction, but investors should understand how much is being charged and how that fee affects the overall economics.
Financing Fees
If the DST uses leverage, there may be costs associated with arranging the financing.
These can include lender fees, financing fees and other transaction expenses.
Debt can be beneficial in a 1031 exchange because some investors need to replace debt associated with their relinquished property. But leverage also creates additional costs and risk.
The terms of the financing matter just as much as the fee itself.
Legal, Organizational and Offering Costs
A DST requires legal documentation, securities filings, accounting, third-party reports and other organizational work.
These costs are typically included in the total capitalization of the offering.
How Should DST Upfront Fees Be Evaluated?
One number I pay close attention to is the difference between what the DST paid for the real estate and the total amount investors are being asked to capitalize.
If a property was acquired for $50 million but the total DST capitalization is materially higher, I want to know exactly where that difference is going.
Breaking down the use of proceeds
Illustrative only. Not to scale. Actual amounts vary by offering.
Some of the difference may be reserves.
Some may represent closing costs.
Some may represent loan costs.
And some may represent commissions, sponsor fees and other offering expenses.
Those categories are not all the same.
For example, cash placed into a reserve account remains an asset available to support the property. A selling commission or acquisition fee does not.
That is why I generally do not evaluate fees simply by looking at one “load” number.
I want to break down the actual use of proceeds.
Purchase Price Matters Too
There is another cost that investors sometimes overlook: the price paid for the property itself.
An offering can have reasonable stated fees and still be unattractive if the sponsor overpaid for the real estate.
I want to understand:
- What did the sponsor pay?
- How does the price per unit or price per square foot compare with similar properties?
- What capitalization rate was paid?
- Were there recent comparable sales?
- Was there a third-party appraisal?
- Is the DST capitalization significantly above the property’s underlying value?
Fees matter, but valuation matters too.
If investors begin an investment at an inflated basis, the property may need substantial appreciation before they simply recover the initial economic difference.
What Fees Exist During the Hold Period?
DST expenses do not end when the offering closes.
Real estate requires ongoing management.
Depending on the structure, the property may have several continuing expenses.
Property Management Fees
Most commercial properties require professional property management.
The property manager may handle rent collection, maintenance, vendor relationships, budgeting, tenant issues and daily operations.
Property management fees are generally paid from property operations.
Asset Management Fees
A sponsor or affiliate may also receive an asset management fee.
Asset management is different from property management.
The asset manager generally oversees the broader investment strategy, financial performance, property manager, leasing strategy, reporting, financing and eventual disposition.
Property management vs. asset management
- Rent collection
- Maintenance
- Vendor relationships
- Budgeting
- Tenant issues
- Investment strategy
- Financial performance
- Property manager oversight
- Leasing strategy, reporting and financing
- Eventual disposition
Investors should understand how the asset management fee is calculated and whether it is based on revenue, equity, assets or another metric.
Leasing and Tenant Costs
Commercial real estate can also have costs associated with attracting and retaining tenants.
Depending on the property type, those costs can include:
- Leasing commissions
- Tenant improvements
- Capital expenditures
- Repairs and maintenance
- Turnover expenses
These are not necessarily “sponsor fees,” but they directly affect the cash flow available to investors.
That distinction matters.
When I review projected DST income, I want to understand what expenses have already been assumed and what could reduce future distributions.
Are DST Distributions Guaranteed?
No.
Projected DST distributions are not guaranteed.
They depend on the actual financial performance of the underlying property.
If occupancy declines, expenses rise, tenants default or unexpected capital costs occur, distributions can change.
That is one reason I do not evaluate DSTs based simply on which offering has the highest projected yield.
A 6% projection is not automatically better than a 5% projection.
The more important question is what assumptions are required to generate that income and how durable those assumptions appear.
What Happens to Fees at Sale?
Eventually, a traditional DST will generally seek to sell its underlying property.
The sale can create another set of transaction costs.
Brokerage Commissions
Commercial properties are frequently sold through investment-sales brokers. A brokerage commission may be paid when the property is sold.
Closing Costs
There can also be legal fees, escrow costs, transfer taxes and other expenses associated with the disposition.
Disposition Fees
Some DST sponsors may charge a disposition fee when the property is sold. Investors should review the PPM to determine whether a disposition fee applies and how it is calculated.
Why Exit Value Matters So Much
The real question is not simply: How much did I pay in fees?
The better question is: What does the property have to accomplish to overcome those fees and generate an acceptable investment result?
Consider two properties.
One has slightly higher upfront expenses but was purchased at an attractive price in a strong market with conservative financing.
The other has lower stated fees but was purchased aggressively and requires significant rent growth to meet its projections.
Consider two properties
- Attractive purchase price
- Strong market
- Conservative financing
- Purchased aggressively
- Requires significant rent growth to meet its projections
Hypothetical comparison for illustration only.
The second investment is not necessarily better simply because its fee percentage is lower.
This is why real estate underwriting and fee analysis need to happen together.
How I Review DST Fees
When evaluating a DST, I generally want to understand four things.
1. What did the real estate actually cost?
Start with the underlying acquisition price.
2. What is the total DST capitalization?
Then compare the property purchase price with the total amount being raised or capitalized.
3. Where does the difference go?
Separate reserves and legitimate transaction costs from commissions and sponsor compensation.
4. What does the property need to sell for?
Look forward.
What level of property appreciation is required to overcome the initial costs?
What exit cap rate is being assumed?
Does the underwriting require aggressive rent growth?
These questions put the fee discussion into context.
Reviewing a DST offering and want help working through the fees and use of proceeds? GCA 1031 can walk through the numbers with you. Schedule a call to get started.
Read the PPM
The Private Placement Memorandum, or PPM, is one of the most important documents an investor receives when evaluating a DST.
It should provide detailed disclosure regarding:
- Selling commissions
- Dealer manager compensation
- Sponsor fees
- Acquisition costs
- Financing costs
- Organizational expenses
- Property management arrangements
- Asset management fees
- Disposition fees
- Conflicts of interest
- Use of proceeds
Investors should understand these items before investing.
If something is unclear, ask.
New to DSTs and want the fundamentals in one place? Our DST Investor Guide covers fees, structure and what to look for before you invest.
The Bottom Line
DSTs have fees.
That should not be surprising. Commercial real estate transactions also have brokerage fees, financing costs, legal expenses, property management expenses and other costs when purchased directly.
The important question is whether the total economics of the investment make sense.
When I review a DST, I want to understand the complete picture:
What was purchased, what investors are paying, how much leverage is being used, what income the property can realistically produce and what needs to happen at exit.
Fees are one piece of that analysis.
They are an important piece, but they should never be reviewed in isolation.
Ready to talk through your 1031 exchange options? Tell us a little about your property, exchange timeline and investment goals, and GCA 1031 will reach out to discuss DST, 721 UPREIT and other passive real estate strategies that may fit your objectives. To get started, you can learn more about Ashley Romiti or contact GCA 1031 to request a consultation.
This information is for educational purposes only and is not intended as tax, legal or investment advice. Fees and expenses vary significantly among DST offerings. Investors should carefully review the applicable offering documents and consult their tax, legal and financial professionals before investing.
