Delaware Statutory Trusts (DSTs) have become popular 1031 exchange solutions for farmers, ranchers, and landowners looking to sell property and defer taxes while reinvesting in passive real estate. But with many DST offerings out there, how do you know which ones are solid investments? The answer lies in underwriting – the thorough due diligence process we perform to vet each DST. Below, we present a conversational Q&A to explain how we underwrite DST investments, what factors a good DST underwriter looks for, and why our reputation for due diligence means we only select a handful of the best DSTs for our clients.

What does it mean to “underwrite” a DST investment?

Underwriting a DST investment means performing an in-depth analysis and due diligence review of the DST offering before we ever recommend it to an investor. It’s similar to how you’d inspect a piece of farm equipment or land before buying – we check everything about the investment to make sure it’s reliable. This includes examining the sponsor (the company offering the DST), the property or properties in the trust, the deal’s financial structure, and all associated risks and assumptions. In short, we leave no stone unturned. As one industry provider explains, reputable firms conduct “comprehensive due diligence on every potential DST offering before presenting it to investors”dstproperties1031.com. We follow that same philosophy – every DST must pass a rigorous vetting process before it ever reaches you.

Why is a rigorous underwriting process so important for DST investors?

When you invest in a DST, you’re relying on the asset’s performance and the sponsor’s management rather than managing property yourself. A rigorous underwriting process is our way of protecting you. By thoroughly vetting each offering, we aim to filter out deals that have hidden problems or excessive risk. Remember, not all DST offerings are created equal. Some might have optimistic projections or underlying issues that could spell trouble if the market shifts. In fact, experts have noted that in today’s market it can be challenging to acquire quality properties at reasonable prices – many DST deals have “tentative breakeven prospects”, meaning they might only break even if everything goes right, and a market downturn could cause pain for investorsblog.factright.com. Our strict due diligence helps us separate the wheat from the chaff (to use a farming analogy), so you only see DST opportunities that we believe can weather various conditions. Ultimately, thorough underwriting gives you peace of mind that the DSTs we present are the most solid options available.

What factors do you look at when underwriting a DST offering?

We evaluate several key factors when underwriting a DST investment. Here are the main areas a good DST underwriter (like our due diligence team) focuses on:

• Sponsor Quality & Track Record: We scrutinize the DST sponsor’s experience, history, and reputation. A sponsor who has successfully managed real estate programs through different market cycles (booms and busts) and has a track record of “doing right by investors” is a positive sign. We look for sponsors with robust operations and communication – essentially, sponsors who have proven they can deliver on their promises consistently.

• Property and Asset Quality: We dig into the real estate itself. This means reviewing the property type (student housing, apartments, self storage, etc.), its location and local market conditions, the tenants and lease terms, occupancy rates, and the physical condition of the property (including any inspections, environmental reports, or needed repairs). For example, we’ll check things like occupancy percentage, length of leases, and cost per square foot to ensure the property is solid. If it’s a portfolio of multiple properties, we review each one. The goal is to make sure the real estate assets can generate the income and value the DST sponsor is projecting.

• Deal Structure and Agreements: We review all the legal and financial structure documents of the DST. This includes the purchase agreements, loan documents, the Private Placement Memorandum (PPM), trust agreements, and any master lease agreements if the DST uses a master tenant structure. We confirm the financing terms (loan interest rate, loan-to-value ratio, maturity, and any prepayment restrictions) are reasonable and won’t handcuff the investment’s flexibility. (For instance, we’d be cautious if a loan had a huge prepayment penalty that might “impede the optimal time to sell” the property. We also analyze how the DST is structured for taxes and 1031 compliance to ensure everything is in order.

• Financial Projections and Assumptions: A good underwriter goes deep into the DST’s pro forma financial projections. We evaluate the income and expense assumptions – are the rent growth rates, occupancy levels, and expense estimates conservative and backed by market data? We prefer projections that are realistic or even slightly conservative, rather than rosy scenarios. We might perform stress tests or “what-if” analyses (e.g., what if occupancy drops or rents grow more slowly) to see how the investment holds up under different conditions. This helps us determine if the DST can still perform for investors even if the economy or market isn’t perfect. Essentially, we want to see that the property’s net operating income (NOI) can support the projected cash flows and that there is some cushion in the numbers. For example, one metric we examine is the breakeven exit cap rate – the cap rate at which the property would need to be sold for investors to break even. Ideally, the breakeven exit cap rate is higher (more conservative) than the purchase cap rate, giving room for market softening; as one due diligence expert notes, “we prefer that the breakeven exit cap rate is higher than the sponsor’s purchase price” to provide a margin of safety.

• Fees and Investor Alignment: DST offerings include various fees (for the sponsor, brokers, property managers, etc.). We analyze the fee structure to ensure fees are not excessive relative to the industry and that the sponsor’s incentives align with yours as an investor. For instance, we check if any upfront mark-ups exist – if a sponsor recently bought the property at one price and is selling it into the DST at a higher price without adding value, that’s a red flag. We also like to see the sponsor’s performance or disposition fees subordinated to investors getting their principal back; in other words, the sponsor should only earn big fees if the investment performs well for investors. Alignment mechanisms like these give us confidence that the sponsor wins when investors win.

• Risks and Mitigations: No investment is without risk, so part of underwriting is identifying the main risk factors and seeing how they’re mitigated. We look for any conflicts of interest (such as the sponsor buying the property from an affiliate), and if they exist, we verify there are independent valuations or disclosures to protect investors. We consider market risks (e.g., what if a major tenant doesn’t renew, or what if interest rates rise) and see if the DST structure has contingency plans (like cash reserves, or master lease provisions to replace a tenant). Essentially, we ask the hard “what could go wrong?” questions now, so that we’re comfortable the DST can handle surprises later. If a deal has too many red flags or relies on overly complex financial engineering to “smooth” returns (for example, using upfront reserves just to make early payouts look higher, we will likely pass on it.

These factors (and more) form a comprehensive checklist that our due diligence team uses to underwrite each DST investment from top to bottom. By examining the sponsor, property, deal structure, financials, and risks, we build a 360° view of the offering.

How do you vet the DST sponsor’s track record and why does it matter?

The sponsor’s track record is one of the most critical factors we evaluate. The sponsor is the company (and people) who acquire the property, set up the DST, and manage the investment over its life. A sponsor with a long, successful history gives us more confidence than a newer, unproven sponsor. We research how the sponsor’s past DST offerings have performed. For example, we look at their full-cycle history: have they taken DST properties full-cycle (bought, managed, and eventually sold them)? If so, did those deals sell at a profit and return investors’ capital? Did they meet or exceed the projected returns, or were there disappointments? As one DST expert notes, reviewing a sponsor’s history of full-cycle liquidity events can reveal whether they consistently deliver outcomes in line with expectations (e.g., did investors get 100% of their principal back and what were the annualized returns). We also check how the sponsor’s current DSTs are performing relative to projections – if a sponsor promised a 5% annual cash flow but the current payout is only 4%, that’s a caution sign that they were too optimistic. On the other hand, a sponsor who consistently hits or exceeds their projected distributions demonstrates more conservative underwriting and strong execution.

In practical terms, we favor sponsors who have extensive experience in the real estate sector and asset class of the DST. For instance, if the DST property is a set of farming facilities or ranchland, we’d prefer a sponsor who has successfully managed agricultural or land assets before, or at least has partnered with expert property operators. We also perform background checks on the sponsor’s principals (looking at their financial stability and any history of legal issues) as part of our process. All of this is to ensure the people managing your investment are trustworthy, competent, and have demonstrated success over time.

Why it matters: When you invest in a DST, you are essentially entering a long-term relationship with the sponsor who will be stewarding your money. A sponsor’s track record doesn’t guarantee the future, but it’s one of the best tools to gauge their reliability. An experienced sponsor is more likely to have encountered and navigated various challenges – whether it’s market downturns, tenant issues, or interest rate changes – and proven they can protect investor capital through those storms. By contrast, a new sponsor might have good intentions but hasn’t yet been “tested” by adversity or a variety of market conditions. So, as part of our underwriting, we typically require a strong track record before we will endorse a DST. In fact, it’s not uncommon for us to decline offerings from newer sponsors who lack a sufficient history, because we place a high value on the sponsor’s demonstrated performance and integrity.

Do you favor DST sponsors with longer track records over newer sponsors?

Generally, yes – we heavily favor sponsors with long, proven track records, and we are very cautious with newer sponsors. To give you an example (in a generic sense), imagine two DST sponsor companies:

• Sponsor A has been syndicating DSTs for 15 years, with dozens of DST offerings completed. They’ve successfully managed properties through both good and tough markets (including the 2008 recession, for instance). Most of their DST deals hit their projected cash flow targets, and when properties were sold, investors got their principal back and earned the anticipated profits. The sponsor’s team is experienced, and they communicate transparently with investors. This kind of sponsor has a long track record that inspires confidence – they’ve shown they can deliver results consistently.

• Sponsor B is a newer entrant, maybe in business for a year or two with one or two DST offerings under their belt. They don’t have full-cycle performance data yet (because none of their deals have gone through to sale), so it’s unclear how they’ll perform over the long run. They might have talented people, but they haven’t been tested in different market conditions, and there’s not much history to review.

In our underwriting process, Sponsor A would clearly stand out as meeting our criteria, whereas Sponsor B might not make the cut until they establish more of a track record. This doesn’t mean new sponsors are bad by default – everyone starts somewhere – but from a risk perspective, we prefer to see a history of success. As one advisor notes, a DST sponsor’s past performance provides valuable insight into their ability to deliver on projections and navigate changing conditions. We owe it to our clients to lean on that insight.

So yes, we typically approve DST offerings from sponsors who have long, successful track records (often the ones that have been around for many years and perhaps managed properties through multiple real estate cycles. Sponsors who are very new or lack a proven history usually get a “wait and see” from us – we might decline to offer their DSTs to our investors until they can demonstrate consistent performance. This selectivity is part of how we protect our investors. It’s one reason you might notice that only a fraction of the available DSTs in the market ever show up on our recommended list – we’re filtering out the rest due in part to concerns about sponsor experience or other risk factors.

How does your due diligence team actually review and select DSTs? What’s your process?

We approach DST due diligence with a team of analysts and a formal process, similar to (and in collaboration with) industry best practices. Here’s an overview of how we review and select DST offerings:

1. Initial Screening: Our due diligence team keeps tabs on the DST market and new offerings. When a new DST deal becomes available, we perform a preliminary screening. At this stage, we’re looking for any immediate deal-breakers. For example, if we know the sponsor has a poor reputation or the property type doesn’t fit our standards, we might stop right there. But if it passes the sniff test, we move forward.

2. In-Depth Analysis: For each promising DST, we assign our due diligence analysts to dive into the documents (the PPM, appraisal, leases, loan agreement, etc.) and perform the analyses we discussed earlier – sponsor background check, property analysis, financial modeling, etc. Often, third-party due diligence reports are available for DST offerings; we obtain those as well (more on this below). Our team members will physically inspect the property if feasible or at least scrutinize property condition reports and market data. We compare the deal’s metrics against our internal benchmarks and against other similar offerings to see if everything lines up competitively (for instance, are the fees in line with industry norms, are the projected returns reasonable given the property type, etc.). Each analyst documents their findings thoroughly.

3. Team Review and Investment Committee: We don’t make decisions in a vacuum. Our team will convene to discuss the DST, often in an investment committee meeting. The analysts present the facts: both the merits and the concerns of the offering. If there are critical issues flagged, we hash them out. We might go back to the sponsor with questions, or require clarifications on certain points. Ultimately, the investment committee decides whether the DST is approved for offering to our clients. Many offerings do not make it through this gauntlet. Only those that satisfy our stringent criteria at every level get approved. This multi-layer review process is akin to what other reputable broker-dealers do – for example, one firm describes how their due diligence analysts independently vet the sponsor, inspect the property, review all documents and third-party reports, and then present findings to an investment committee for approval. We operate with that same high standard.

4. Offering to Clients: If a DST clears our due diligence process and is approved by the committee, only then do we present it to you as an available investment option. By the time it reaches you, we’ve likely declined dozens of other deals and only kept the few we truly believe in. We do this because we know your investment is important – it could be the proceeds of your farm or ranch sale – and we treat it with the care it deserves.

Figure: An overview of the multi-layered due diligence process for DST investments. Each offering undergoes thorough Sponsor review, Deal/Structure review, Property analysis, and Financial evaluation before it is approved for investors. We collaborate with third-party due diligence experts and use an investment committee to ensure that only the highest-quality DST deals make it to our clients.

Throughout this process, documentation and consistency are key. We maintain detailed records of our analysis for each DST. This way, we can demonstrate that we followed a rigorous process every time (which is important not just for us, but also for regulatory compliance). It’s not glamorous work – it involves a lot of reading fine print and running numbers – but it’s essential to safeguarding our clients’ interests.

What role do independent third-party reports (like FactRight) play in your underwriting?

We heavily utilize independent third-party due diligence reports as part of our underwriting. FactRight is a prime example of such a third-party resource. FactRight is a firm that specializes in providing in-depth due diligence on DST offerings and other alternative investments – essentially, they are professional “second set of eyes” for firms like ours. When FactRight (or similar firms) review a DST, they scrutinize the sponsor’s background, the property, the financial model, and they often highlight any red flags or areas of concern.

We pay close attention to these reports. They offer an “independent professional opinion” in addition to our own, and often these third-party reviewers have analyzed hundreds of offerings over the years, giving them a broad perspective on what’s normal in the market and what’s not. For example, a FactRight report might tell us that the fees in a particular DST are higher than average, or that the projected rents are on the high end compared to market comps – invaluable context that can either validate our views or prompt deeper investigation. These reports also include checks that might be hard for individual firms to do alone, such as comprehensive background checks on sponsors and key persons.

In our process, whenever a third-party report is available (FactRight or another provider), we incorporate its findings into our analysis. It’s like having a specialist consultant double-check our work. Often, the third-party due diligence will flag key issues or risks, which we will then follow up on. Maybe the report notes a potential conflict of interest, or questions the assumptions in the financial projections – we take those flags seriously and ensure they are resolved to our satisfaction. As FactRight’s COO has pointed out, leveraging third-party due diligence can help advisors save time and money by focusing on the most important risks. We agree – it makes our process more efficient and robust.

So, to sum up, independent reports are a crucial layer of our DST underwriting. They reinforce our internal due diligence and add an extra level of scrutiny. By the time you see a DST investment from us, not only has our internal team vetted it, but often an external expert like FactRight has also reviewed it. This twofold review is part of why only a handful of DSTs pass muster – between our standards and the third-party’s analysis, many deals simply don’t make the grade. And that’s exactly how we want it, because it ensures the ones that do pass are truly top-tier.

You mention only selecting a handful of DSTs – how selective are you, really?

Extremely selective. At any given time, there may be dozens of DST offerings available in the market from various sponsors. However, we firmly believe that quality is far more important than quantity when it comes to DST investments. We would rather offer our clients a small number of excellent, thoroughly vetted opportunities than a long list of mediocre ones. In practice, this means we reject many more DSTs than we approve. By the time you see an offering, it’s the exception, not the rule.

To give a sense of scale, consider that the DST industry has grown a lot – equity sales of DSTs hit record highs in recent years – and many new sponsors have entered the fray. With that influx, there’s a wide range of deal quality out there. Our job is to sift through them. We might start with, say, 100 available DST deals over a period – after applying our rigorous underwriting, maybe only 10 or 15 of those meet our standards (hypothetically). The rest, we either take a pass on or put on a watchlist pending improvements or more track record. It’s not about hitting a quota; it’s about maintaining a high bar.

Our reputation is built on this selectivity. We know that as a landowner or farmer investing your hard-earned equity, you’re counting on us to guard your interests. If we were to recommend a DST that failed due to poor underwriting, not only would it hurt our clients, it would also damage our standing. Therefore, we stake our reputation on thorough due diligence. We only “green light” those DSTs that we would feel comfortable investing in ourselves or recommending to our own family. This conservative approach is something we take pride in. As another due diligence-oriented firm described, they ensure every DST investment they offer has passed multiple levels of review (sponsor, lender, legal, and broker-dealer analyses) before it ever gets to the investors. We operate with the same philosophy of exhaustive vetting.

In summary, if you’re seeing a DST on our platform or in our recommendations, you can trust that it’s gone through a fine-toothed comb review process. Out of the many DSTs out there, we’ve chosen only that handful because they met our strict criteria for sponsor quality, property strength, fair structure, and realistic projections. This selective curation is a core part of our value to you as an investor.

How does your focus on due diligence and reputation benefit me as an investor?

Investing through a firm that is “heavy” on due diligence means you get an added layer of protection and expertise applied to your investments. We like to say that our interests are aligned with yours – we succeed when you succeed. By putting our reputation on the line with each offering, we are motivated to get it right every time. Here’s what that means for you:

• Confidence and Peace of Mind: You can invest with greater confidence knowing that professionals have vetted every aspect of the DST. While no investment is risk-free, you won’t be going in blind or solely trusting a sales brochure. You have our analysis (and often a third-party’s analysis) backing the deal. We strive to ensure there are no surprises lurking in the fine print.

• Quality over Quantity: You don’t have to sort through a maze of offerings – we curate the options. Just as you rely on a trusted agronomist to advise which crops or feed are best, you rely on us to present only the DSTs that we believe stand a strong chance of meeting their goals. We’re effectively doing a lot of homework on your behalf.

• Long-Term Partner: Our emphasis on due diligence is part of a long-term relationship approach. We’re not in this for a quick sale; we want you to achieve your investment and tax-deferral objectives over the long haul. By guarding our reputation and only dealing in quality offerings, we aim to build trust that lasts. Many of our clients are repeat investors who come back for multiple transactions – that only happens if we’ve proven our value through careful guidance.

• Transparency and Education: Because we dive deeply into each DST, we can explain the pros and cons to you in plain language. If you have questions about why we chose a certain DST or passed on another, we’re happy to share our reasoning. We consider it part of our job to educate our investors. In fact, all the factors we discussed above – sponsor experience, property details, financial assumptions – are things we openly discuss with you when reviewing a DST investment. By being thorough upfront, we can be more transparent with you about what you’re investing in. This helps you make more informed decisions.

To put it simply, our heavy focus on due diligence and our commitment to our reputation means you get a trustworthy guide in the complex world of DST investments. We know that as a farmer, rancher, or landowner, your expertise might be in growing crops or raising cattle – not necessarily in analyzing real estate trusts. That’s perfectly fine, because it’s our job to bring that financial and analytical expertise to the table for you. We take that responsibility seriously.

Bottom Line:

Underwriting DST investments is a meticulous process, but it’s one we embrace because it protects our clients and upholds our firm’s integrity. By focusing on the key factors – from sponsor track record to deal details – and by leveraging third-party due diligence like FactRight, we ensure that only a select few high-quality DSTs earn our recommendation. This way, you can invest confidently, knowing that behind the scenes a whole lot of serious homework has been done to safeguard your 1031 exchange investment. In the end, our thorough approach is about earning and keeping your trust, so you can focus on what you do best (running your farm or ranch) while we focus on what we do best: vetting and delivering solid real estate investment opportunities for you.

Sources: We’ve drawn on industry best practices and insights from due diligence experts in crafting this guide. Notable references include FactRight’s research on DST due diligence and third-party reports (blog.factright.com), and commentary on the importance of sponsor track records (nerej.comnerej.com). These sources reinforce the principles behind our rigorous underwriting process and our commitment to selecting only the best DST investments for our clients.