Due Diligence – Why It Is So Important
DST’s or Delaware Statutory Trusts could potentially be the perfect structure for an Accredited Investor who wants to own a passive and fractional interest in institutional-quality commercial real estate alongside other investors. Each investor is a separate owner within the Trust, and each owner receives his or her percentage share of the income, tax benefits which can include depreciation and amortization, and any appreciation of the property. Investors will no longer have the headaches and responsibilities of day to day hands on management. At Provident1031, we apply an exhausting due diligence process to all of our properties that we offer our clients. Our due diligence process includes the following.
Sponsor Review
A Sponsor is the real estate syndicate that locates and acquires real estate to be held in a DST structure and arranges for a master tenant to lease in most cases. The sponsor offers these real estate investments to accredited investors in what is referred to as “beneficial interests” through Broker Dealers or Registered Investment Advisors. At Provident1031, when we perform our due diligence on a particular sponsor and asset our team considers the following:
- Experience with the offered asset class
- Executive team experience, integrity, and track record
- National footprint and track record
- Size and breadth of the sponsor
- Number of deals taken full cycle
- Costs/fees, and how compensation is split with investors
At Provident1031 we believe a successful DST real estate investment begins with selecting a well-vetted sponsor. Upon selection of a sponsor our due diligence team moves forward with the specific deal structure.
Deal Structure Review
Next in our process is a comprehensive review of all of the agreements related to the DST. These include sale agreements, loan provisions, lease agreements, tax structure, and the property disposition plan. We review in its entirety the Private Placement Memorandum (PPM), which is a legal disclosure document that is provided by the sponsor. The PPM is replete with all details of the real estate offering and also includes a detailed description of the subject property or properties. The PPM also includes all financial details of the offering, the projected cash ows and returns, and the specifics of the DST deal structure. The PPM also contains relevant third-party due diligence reports, all subject leases, any associated agreements and/ or contracts, or other provisions of the offering.
Property Review
Provident1031 completes a thorough review of the following property details:
- Occupancy and occupancy trends
- Appraisal and market
- Rental trends and rent rolls
- Property inspection and condition reports
- Cost and anticipated cost for any improvements
- Market comparisons and market absorption
- Quality of lease and length of lease term
- NOI – Net Operating Income
Capitalization Rate Upon Exit
The CAP rate upon disposition is the value of an asset by capitalizing and calculating the expected Net Operating Income (NOI) at the end of the proposed investment period. The cap rate is calculated by dividing the net operating income by the sales price of the property upon disposition.
COC or Cash-on-Cash Return
Cash-on-cash return is a calculation in a real estate investment that calculates income earned on the cash invested funds. It is calculated by taking the annual pre-tax dollar income distribution and dividing it by the total dollar amount of the investment
At Provident1031, investors can be assured that we have done our homework on every sponsor and specific offering on our site. Our team of seasoned professionals meets and speaks regularly with all of our affiliate sponsors and performs the important research on our client’s behalf. While all real estate has risks that are outlined in each specific real estate offering in great detail, clients of Provident1031 can rest assured that every offering and sponsor has undergone and passed our strict due diligence requirements. Ready to talk to someone? Contact our team at Provident1031.com or call 281.466.4843.
