What is a Delaware Statutory Trust Sponsor Company?
By: Alex Madden, Vice President, Kay Properties and Investments, LLC
Many 1031 exchange investors have never heard of a DST Sponsor, what they are, or what they do. It is important for investors considering DST properties to understand the role of a DST sponsor and what they do. After reading this article, a 1031 exchange investor should have a better understanding of what a DST sponsor company is and does, and why they play a critical role in the DST 1031 investment picture.
What is a DST Sponsor?
As with other real estate investments, the term “sponsor” is used to identify the person or firm that basically “quarterbacks” the DST investment from start to finish, including structuring the investment to make it available for accredited investors including those in a 1031 exchange as well as cash investors. Whether it is an entire portfolio of net-leased retail buildings located across multiple geographic areas or a single multifamily building located in a single neighborhood, the role of the DST Sponsor is to find viable real estate deals in which accredited investors will be interested in investing for their DST 1031 exchange process.
The Role of a DST Sponsor?
A DST Sponsor’s role starts early on in a real estate investment. Many times, the DST Sponsor is actively involved with negotiations or plans months before investors or 1031 advisors even hear about a potential investment property. Typically, a DST Sponsor company will evaluate hundreds of properties across a vast swath of geographic territory for purchase, until they eventually make offers on a few of them. Sometimes the DST Sponsor finds these properties via on-market opportunities and other times off-market opportunities. Once a property is identified as a potential investment opportunity, they will then negotiate the purchase agreement and assemble the necessary equity capital and debt financing needed to acquire the property. The DST Sponsor then negotiates the terms of the purchase and sale agreement, and prepares all the investor marketing materials. The DST Sponsor also oversees all pre-acquisition activities, including all due diligence (such as engaging specialists to provide third-party reports and reviewing existing financial information, among other things.).
As mentioned, DST Sponsor companies will often handle most of the financing aspects related to acquiring properties offered for a DST investment. This can include combining the firm’s own capital with some kind of bridge loan for the acquisition, and then arranging any long-term debt that will be included in the transaction. This long-term debt can be an extremely important element from an investor’s perspective, as many DST investors need to replace debt as part of their DST 1031 exchange, and a property that has existing leverage can be helpful to these clients.
How We Evaluate Our Sponsors
Clearly DST Sponsors play an important role in a DST real estate investment, and therefore it is critical that the sponsor be highly qualified. Kay Properties & Investments works with 25-30 different DST Sponsors who, along with their property offerings, are always carefully vetted. A good DST Sponsor brings specific expertise to the project like intimate knowledge of the market or a deep understanding of the asset class – or both!
Not all sponsors are created equally. Some are much more qualified than others. So we ask the following questions for any prospective DST Sponsor.
- How much experience do you have with the local market and with that asset class?
- Have any of your prior real estate investment offerings failed to meet expectations?
- How good are you at evaluating risk?
- What systems do you have in place to ensure proper management of the project?
In short, the DST Sponsor is an important element in a DST investment’s success, so it’s important to work with a DST Sponsor that’s highly-qualified. When investing in DST investments, be sure to understand who you’re working with, what they’re responsible for and how they plan to execute on the project’s business plan.
Kay Properties provides a complete platform for real estate investors including providing access to a marketplace of DSTs from more than 25 DST sponsor companies, custom DSTs only available to Kay Properties clients, A DST secondary market – for those wanting to sell their DST interests prior to the property selling, the largest selection of debt free DSTs in the industry and leveraged DSTs for a 1031 debt replacement. For more information, please call Kay Properties today at 1-855-899-4597 or visit www.kpi1031.com to register for one of our exclusive DST 1031 events.