DST Due Diligence Checklist: What to Read in the Offering Documents

What to confirm in the offering documents

The offering documents set the terms of an investment in a Delaware Statutory Trust. A marketing brochure or a verbal summary governs nothing; where either conflicts with the offering documents, the offering documents control. So confirm every item below against the offering documents themselves, not against the pitch.

Property

• Property type identified (multifamily, industrial, office, retail, medical, other)
  
• Location and submarket understood; market growth or decline assessed
  
• Current occupancy rate confirmed (target: 93%+)
  
• Physical condition reviewed; age of major systems (HVAC, roof, plumbing) noted
  
• Comparable properties reviewed for rent levels and sale prices
  
• Worst-case scenario addressed in the offering documents (rent decline, occupancy drop)
  

Tenants and leases

• Major tenants identified by name and creditworthiness
  
• Lease expiration dates mapped; weighted average lease term calculated
  
• Renewal likelihood assessed for each major tenant
  
• Rent escalation provisions confirmed (fixed increases, CPI, flat)
  
• Revenue concentration risk quantified (% from top 1-2 tenants)
  
• The offering documents address what happens if a major tenant does not renew
  

Financing

• Loan amount and loan-to-value ratio confirmed
  
• Interest rate type confirmed (fixed or variable; if variable, cap structure reviewed)
  
• Loan maturity date compared to projected hold period
  
• Prepayment penalties or yield maintenance provisions identified
  
• Lender identity and type noted (bank, CMBS, life company)
  
• Plan for loan maturity addressed if it occurs before projected exit
  

Sponsor

• Years in business and number of completed DST offerings confirmed
  
• Full-cycle performance data reviewed (projected vs. actual returns)
  
• Total assets under management confirmed
  
• Sponsor experience with this specific property type and market verified
  
• Prior offering problems, disputes, or litigation disclosed and reviewed
  
• Sponsor co-investment alongside investors confirmed or absence noted
  
• Reference from prior offering investor obtained (if possible)
  

Fees

• Sponsor acquisition fee quantified (typical: 1-3%)
  
• Selling commissions and offering costs quantified (typical: 5-10%)
  
• Total upfront fee load calculated as % of investor equity (typical range: 10-18%)
  
• Annual asset management fee confirmed (typical: 0.5-1.0%)
  
• Annual property management fee confirmed (typical: 4-8% of gross rent)
  
• Disposition fee confirmed (typical: 1-3%)
  
• "Use of proceeds" chart reviewed: how capital is allocated between acquisition, fees, and reserves
  
• Fees in the offering documents compared to verbal or marketing representations; any discrepancies flagged
  

Operating restrictions (the seven deadly sins)

• No new capital contributions after closing confirmed
  
• No refinancing or new borrowing confirmed
  
• No reinvestment of sale proceeds confirmed
  
• No new or renegotiated leases (tenant bankruptcy/insolvency excepted), or a master lease in place that handles leasing, confirmed
  
• Capital spending limited to repairs, minor non-structural improvements and legally required work confirmed
  
• All cash other than reserves distributed currently confirmed
  
• Cash between distributions held in short-term debt only confirmed
  
• Reserve adequacy assessed given these constraints
  

Tax treatment

• DST structure confirmed as qualifying under Revenue Ruling 2004-86
  
• Annual grantor trust tax statement confirmed
  
• Tax basis of beneficial interest understood
  
• Distribution tax treatment clarified (return of capital vs. ordinary income)
  
• 1031 exchange compatibility at exit confirmed
  
• Special tax risks or considerations noted
  

Risk factors

• Risk factors section of the offering documents read in full (not skipped)
  
• Property-specific risks identified (not just generic boilerplate)
  
• Tenant credit risk assessed
  
• Interest rate risk assessed
  
• Market-specific risks assessed
  
• Risks that seem underweighted relative to actual situation flagged
  

Distributions

• Distribution frequency confirmed (monthly, quarterly)
  
• Distribution calculation method understood (from NOI after expenses, debt service, reserves)
  
• Conditions under which distributions can be reduced or suspended identified
  
• Preferred return structure confirmed (if applicable)
  
• Profit allocation between investors and sponsor understood
  
• Waterfall structure reviewed for fairness
  

Exit strategy

• Expected hold period confirmed with flexibility parameters
  
• Triggers for disposition decision identified (timeline, market opportunity, loan maturity)
  
• Sale method described (broker, auction, direct negotiation)
  
• Disposition timeline and process outlined
  
• Proceeds distribution method described
  
• Extension provisions reviewed (can sponsor extend hold indefinitely?)
  
• 721 pathway availability confirmed or ruled out
  

The 10-question test

These are the questions the offering documents should let you answer before you commit capital:

1. Do I understand the property, its location, and its competitive position in the submarket?
2. Do I understand the tenant base, lease terms, and concentration risk?
3. Do I understand the financing structure, including interest rate, maturity, and refinancing constraints?
4. Do I understand the sponsor's track record with completed offerings in this property type?
5. Do I understand all fees and the total fee load, and have I calculated the fee-adjusted return?
6. Do I understand the operating restrictions and what they prevent the sponsor from doing?
7. Do I understand the tax treatment and how this investment fits my 1031 strategy?
8. Have I read the risk factors section and identified the material risks specific to this offering?
9. Do I understand how distributions are calculated, when they can be reduced, and how profits are split?
10. Do I understand when and how I will get my capital back, including what the sponsor controls and what I do not?

If any of the 10 stays fuzzy, keep reading the offering documents, or ask your advisor to clarify, before you commit.

When to get legal review

If you are committing $250,000 or more, a real estate attorney or tax attorney can review the offering documents for you, typically for $1,000 to $3,000. A lawyer can spot unusual provisions, translate legal language into plain terms, flag risks that surface only if circumstances change, and check the 1031 eligibility claims.

The sponsor should welcome due diligence questions. If they discourage scrutiny or pressure you to commit before you finish your review, that itself is a finding worth noting.