What Does DST “Sponsor” Mean?
Yesterday in a client meeting our team referred several times to the word “sponsor” as it relates to Delaware Statutory Trusts (DST’s). We were counseling a family about institutional grade commercial real estate as a 1031 Exchange replacement property. The family had recently sold an RV park and was facing the certainty of several hundred thousand dollars of capital gains tax were they not to use a DST though one of our sponsors. The family wanted out of the day to day active management of owning commercial real estate and was ready to travel the US in their new Airstream travel trailer, so locating a replacement property that they would manage on their own was out of the question for them.
At one point in our meeting the wife raised her hand and said, “ you keep saying sponsor, what does that mean”? She went on to say that her only reference to the word “sponsor” was for her sister who had a “sponsor” in Alcoholics Anonymous.
It dawned on me at that point that we were using jargon and vernacular that we were accustomed to but the general public was not. We quickly apologized and explained that the sponsor was the commercial real estate company or firm who was offering the particular DST syndication or offer.
At Provident1031.com we consider the sponsor and the sponsor’s track record to be of utmost importance. Our due diligence team regularly dismisses sponsors who are newer to the DST structure and who have not yet demonstrated a history of rewarding investors consistently with quality management, attractive returns, careful judgment and sound underwriting. Provident1031 offers a “stable” of approved and vetted DST sponsors of which we consider to be “best of breed” and who collectively control approximately 70% of all current DST offerings. A few notable mentions are as follows”
Cantor Fitzgerald – https://www.cantor.com/
Inland – https://inlandgroup.com/
BlackCreek – https://blackcreekgroup.com/
Capital Square – https://www.capitalsquare1031.com/
Passco – https://passco.com/
We would suggest taking a moment and clicking on the links provided above for a quick glance at the breadth and scope of these sponsors. Most are decades old, have handled billions of dollars in commercial real estate and represent some of the largest and most successful real estate firms in the US and around the globe.
When selecting a DST sponsor you should be looking for a firm who has been in business for many years and has taken many DST offerings “full cycle,” which means that the sponsor has underwritten and purchased the subject property. They have financed and managed the property and have raised the necessary capital. The sponsor has paid investor returns, including the monthly cash flows and the growth component of the total return that happens at the sale of the property when the investors return of capital takes place. Full cycle means essentially beginning to end. DST full cycle time lines usually run about 7 years but can be more or less. A shorter full cycle might happen in as few as 5 years and a longer cycle could run as long as 10 years. Most DST offerings have a good idea if the “full cycle” period is expected to be closer to the longer or shorter end of the timeline and can disclose that to you before you invest your funds.
A 1031 Exchange to a DST will have several key participants which are:
The Investor who is usually the individual, family or entity selling investment real estate
The Qualified Intermediary (QI), who is the 3rd party facilitator of the tax deferred exchange and who you must have to complete a 1031 exchange.
Title Company and Real Estate Agents: A title company will always close the sale of your property and you may or may not have real estate agents involved.
The Sponsor: The firm providing the real estate offering.
CPA – Most CPA’s are not well versed in these type of real estate offerings. To find a list of CPA’s who are familiar with DST’s visit https://provident1031.com/wp-content/uploads/2020/07/DST-CPA-sheet.pdf The CPA can assist the seller in determining your property “basis” and how much tax you might save/defer by using the 1031/DST structure.
The Advisor who is securities registered and either a Broker Dealer (BD) or Registered Investment Advisor (RIA) Fiduciary. The Broker Dealer is commission based and the RIA is a Fiduciary and fee based. We recommend the RIA. It is important to ask about commissions, fee’s, costs and how all of the parties get paid. Every DST plan sponsor offers a Private Placement Memorandum (PPM) but those can run 250-300 pages and the average lay person needs some help understanding some of the terms, definitions, vernacular and internal calculations. Ask your advisor about how people are paid, how your returns are calculated and what to expect in regards to cash flows, tax advantages, total return and every other important aspect of investing your hard earned dollars.
Read the PPM so that you can understand and evaluate the risks of investing in the DST and discuss them with your advisor. An RIA Fiduciary advisor can council you to discuss if a DST is the best idea for you or not. They are legally bound by law to put your best interest first and it’s important to understand if the DST structure is the best fit for you.