A key characteristics of DSTs, and a mitigating factor for the inherent loss of control associated with a DST investment, is the significant due diligence an offering passes through before becoming available to investors. The due diligence any DST passes through can be summarized in four levels.

Sponsor

The first level is with the sponsor. The sponsors who acquire, syndicate, and manage the DST assets generally have stringent investment criteria, with acquisitions teams commonly underwriting hundreds to thousands of deals in a given year and ultimately bringing only a small fraction to market for investment.

As an example, one Horizon sponsor partner underwrote more than 8,000 properties last year and ultimately closed on only 80.

Third-Party Legal Counsel

The second level of due diligence is with the outside legal counsel that author the DST offering materials (Private Placement Memorandums), which disclose all of the relevant information related to the DST sponsor, property, and deal.

Third-Party Reporting

The third level of due diligence is with the third-party reporting companies that comprehensively review the DST offerings, providing useful analysis and commentary for, finally, the broker-dealer review.

Broker-Dealer

The fourth level of due diligence is the broker-dealer review. This is the final and, ultimately, deciding step of the due diligence for a given DST offering, which will result in a broker-dealer either approving of declining the DST for investment. At Horizon, with our broker-dealer WealthForge, we maintain rigorous review standards, examining every offering with the same care based on our deep experience over multiple market cycles in the securitized 1031 industry.

Lender

A bonus, fifth level of due diligence is applicable to levered DST offerings, as the lender will of course conduct their own due diligence, confirming the property value through appraisals, assess environmental risks through reports, determine necessary reserves for property maintenance, analyze the property’s net operating income, and consider the loan-to-value and debt service coverage ratio in their underwriting criteria.

It is not until all of these due diligence steps are successfully passed through that an investor will have access to invest in a DST. Coupled with this extensive due diligence is full disclosure of all information related to the DST sponsor, property, market, and structure, which is furnished to the investor via the DST Private Placement Memorandum. Additionally, all fees, expenses, and reserves are conveyed in detail in an Estimated Use of Proceeds section of the PPM as well as Financial Forecasts with a pro forma exhibiting the sponsor’s projected cash flow to investors, typically modeled over a 10-year period.