Perhaps the most attractive feature of a DST investment as a 1031 exchange vehicle is its entirely passive nature, which frees real estate owners from the many burdens of active management. However, that passive nature comes at some cost, which primarily are loss of control, illiquidity, and moderately higher costs in fees than would usually be incurred in a traditional real estate transaction.
Loss of Control
While most interested real estate investors come to the DST specifically to enjoy a more passive real estate investment and the DST investors are the owners of the DST property as beneficial interest owners of the Trust, the DST sponsor will retain control of all aspects of the asset and property management, including its ultimate disposition.
Illiquidity
While DSTs as a security may be sold by an investor to a third-party during the hold period, DSTs do not have a secondary market and investors should consider their investment as illiquid, with hold periods ranging from 2-10 years, but most typically going full cycle in 5-7 years.
Fee Structure
DSTs are structured with all fees and expenses underwritten into the offering, so no separate costs exist for the DST investor. From an investment point of view, there is simply one purchase agreement and one transaction, however, the applicable acquisition expenses and fees are structured into the deal. As a simple illustration, a property may be purchased for $100, there are $10 in acquisition costs and fees for all of the work to bring the deal to market, including the DST selling commission, so the price to investors is $110. In a traditional real estate transaction, there would be separate costs associated with appraisals, market studies, inspections, environmental reports, lender fees, and more, depending on the property, in addition to the real estate broker commission. In a DST, these items are included in the all-in price, though with compensation to the sponsor and broker-dealer for their valuable services. Also included in the front-end load are reserves set aside for any capital expenses needed at the property during the hold period, a prudent measure taken to ensure the property is well-maintained and ultimately in optimal condition upon the time of sale. In addition to accounting for the fees and reserves, which are fully disclosed for each DST, investors may also have interest to review the property acquisition value relative to the third-party appraised value. DSTs are commonly purchased below appraised value, which may be relevant with respect to offsetting a portion of the fee load.