In previous posts I have written about the merits of the Delaware Statutory Trust (DST) and how this popular securitized investment vehicle may help individuals complete their property exchanges and ultimately, achieve their financial goals. I have also addressed the risks associated with investing in real estate and the unique risks related to DSTs.
In this article, I highlight the fees involved when investing in DSTs, with the intent of bringing context to the DST fee structures so that investors are better informed.
Rather than a commentary defending the fees associated with DSTs, this is intended to be guide that helps illustrate what the fees are and how they work. If you are an investor considering a 1031 exchange and you are evaluating DSTs, this discussion will hopefully help you weigh the potential benefits, risks and fees associated with the investment so that you’re able to make a well-informed decision.
First, to my knowledge, it is important to remember that none of the companies involved in DST 1031 transactions work for free! That’s of little surprise since DSTs are considered institutional quality real estate investments that require the expertise of several skilled professionals equipped to help investors. Additionally, my purpose here is not to offer an extensive comparison between a DST and direct investment real estate transaction. Certainly, any investment in real estate, through a DST or otherwise - has costs and risks. In general, from my experience, direct investments in real estate may have lower fees than DSTs.
And fees, while an important consideration, should only be part of the evaluation process. As my wife and I are considering a new car for the family – the analogy of car shopping certainly works here; price is obviously a consideration, but we also want to factor in the drivability, reliability and safety of the vehicle as well.
I think it is easiest to break the fees into three groups; Upfront, Ongoing and At-Sale (Disposition):
Upfront Fees
The total of the upfront fees involved in a DST offering are often referred to as the “load”. You can find the load of a DST you might be evaluating in the Private Placement Memorandum (PPM). Typically, the load is expressed as a percentage of the equity being invested into a DST program. For example - a multi-family DST offering from a major sponsor shows a load of roughly 15% in the PPM.
The fact that the load is expressed as a percentage of equity can create some level of confusion, as more commonly, a real estate investor would think of the costs associated with buying real estate to the total purchase price rather than the equity invested. In the instance above, this DST has a loan to value ratio of approximately 50% - so while the load based on the equity invested is roughly 15%, the load compared to the syndicated price would be around 7.5%. The typical costs that make up the upfront load include selling commissions, dealer fees, acquisition costs and closing and financing costs.
Ongoing Fees
DSTs also have ongoing fees that will be disclosed in the PPM. In general, ongoing fees include an Asset Management Fee and a property management fee. The asset management fee is compensation to the asset manager for providing day to day services that typically include supervising services performed by lenders, attorneys, underwriters, and consultants among others. The asset manager will also provide bookkeeping services, process distributions and provide communication to investors.
The fee for ongoing property management of real estate in a DST is often referred to as the Property Management Fee. The property manager may be an independent company or a subsidiary of the sponsor offering the DST. Property management fees are typically a percentage of income generated by the property. They will often also have incentive-based fees payable to the property manager that are based on performance of the property.
The amount of fees and responsibilities of the property manager will vary greatly depending on the type of property. Some of the normal responsibilities of the property manager include collecting rents, paying expenses, preparing budgets, supervising employees and leasing the property.
Disposition Fees
These are the fees that are paid at the time the property is sold. As with the other fees, disposition fees will be disclosed in the PPM. Usually, the disposition fee on a DST will be shown as a maximum amount that could be charged. It also will identify how that fee is to be parsed between the asset manager and potentially brokers, which will vary depending on the sale.
Certainly, there are fees associated with investing in DSTs as there are with any investment, however there are benefits as well that are outlined in more detail in our other posts. Remember that with DSTs, the fees are “baked in” to the offering. Investors don’t incur out-of-pocket expenses and are not writing checks to address fees. Additionally, when considering DSTs, it is important to remember when the difference between the DSTs’ fees-to-equity structure as opposed to fees-to-syndication price.
If you would like to further discuss fees, we are always happy to set up individual meetings to address your unique situation in detail. Feel free to contact me at your convenience.
