Every Delaware Statutory Trust offering comes with a private placement memorandum — the PPM — and the most important section for an investor to read is the risk factors. DSTs are sold as Regulation D 506(c) offerings, private securities available to accredited investors, and the PPM is the disclosure document that lays out, in detail, everything that could go wrong. The risk-factors section is where the sponsor discloses the material risks of the deal: the things that could reduce or eliminate your distributions, impair the property's value, lock up your capital, or jeopardize the tax treatment your exchange depends on. Many investors skim it as legal boilerplate, but that is a mistake — buried in the standard language are the risks that are genuinely material to this specific property, debt structure, and sponsor. This guide explains why the risk section matters, walks through the major risk categories (market and tenant, financing and interest-rate, liquidity and sponsor), and shows how to read the risk factors critically so you can identify which risks matter most for a given offering. DST interests are securities offered to accredited investors through a broker-dealer after a suitability review; distributions and returns are never guaranteed. Verify current rules with your advisors — this is educational information, not investment, tax, or legal advice.
Why the Risk Section Matters
The risk-factors section of a DST's private placement memorandum is the part of the document that tells you, honestly and in detail, what could go wrong with the investment — and that makes it essential reading, not a formality to skim past. Because DSTs are private Regulation D 506(c) securities sold to accredited investors, they are not registered with the SEC the way a public offering is, and the PPM is the central disclosure document. Within it, the risk-factors section is where the sponsor is obligated to lay out the material risks an investor should weigh before committing capital.
It matters because a DST is illiquid, passive, and long-term: once you invest, you generally cannot sell, you do not control the property, and your capital is committed for years. That means the risks disclosed in the PPM are not abstractions — they are the specific ways your distributions could fall, your capital could be impaired, or your 1031 tax deferral could be jeopardized, and you have limited ability to react once you are in. Reading the risk factors before you invest is your main opportunity to understand the downside while you can still decide not to proceed. The accredited-investor and suitability framework around 506(c) offerings exists precisely because these risks are real and the investments are not appropriate for everyone.
So the risk-factors section matters because it is the honest catalogue of everything that could impair the investment, and a DST's illiquidity and passivity mean you must understand those risks up front. Why the risk section matters — it is the PPM's detailed, obligatory disclosure of the material risks of a private 506(c) DST offering, and because a DST is illiquid, passive, and long-term, reading it before you invest is your main chance to understand the downside while you can still decline — makes it the most important part of the document for an investor. It is not boilerplate; it is the catalogue of what could go wrong. Understanding why it matters frames how to read each category. The risk-factors section matters because it discloses everything that could impair your DST investment, and the vehicle's illiquidity means you must understand those risks before you commit.
Market & Tenant Risks
The first major category in most DST risk-factors sections covers market and tenant risks — the risks tied to the real estate itself and the people paying rent on it. Market risk is the possibility that broad conditions in the property's sector or region deteriorate: oversupply, declining demand, falling rents, or shrinking property values can all reduce the income the DST produces and the price it eventually sells for. Because a DST typically holds one property or a small portfolio, it is exposed to the specific market it operates in, not a broadly diversified pool.
Tenant risk is the more granular version: the income that funds your distributions comes from tenants paying rent, so anything that interrupts that rent threatens your cash flow. The PPM will disclose risks such as vacancy (space sitting empty between tenants), rent declines at lease renewal, and tenant default (a tenant failing to pay or going bankrupt). The severity depends on the property's structure — a single-tenant net-lease property has concentrated, binary tenant risk (one default can mean zero income), while a multi-tenant property spreads the risk but requires more active management. The risk factors will also note lease terms, tenant credit quality, and re-leasing assumptions, all of which affect how exposed the deal is.
So market and tenant risks are the property-level risks at the foundation of a DST — broad market deterioration and tenant-specific problems like vacancy, rent declines, and default — and they directly threaten the distributions you are counting on. Market and tenant risks — the risk that the property's sector or region declines (oversupply, weak demand, falling rents and values) and the risk that tenants stop paying (vacancy, rent declines at renewal, tenant default or bankruptcy), with severity depending on whether the property is single- or multi-tenant and on lease terms and tenant credit — are the foundational property-level risks disclosed in the PPM. They directly threaten distributions. Understanding them is the starting point for reading the risk section. Market and tenant risks are the property-level risks — declining markets and tenants who stop paying — that most directly threaten a DST's distributions.
Your distributions are only as reliable as the tenants paying the rent and the market they sit in — which is why market and tenant risks lead almost every DST risk-factors section.
Financing & Interest-Rate Risks
Many DSTs use leverage — non-recourse debt secured by the property — to boost yield and, importantly, to let an exchanger replace the mortgage debt they had on their relinquished property. That leverage introduces a second major risk category: financing and interest-rate risk. The PPM will disclose the loan's key terms — its size relative to the property value (loan-to-value), its interest rate and whether that rate is fixed or floating, and its maturity date — because each of these shapes how vulnerable the deal is to financing problems.
The central concern is refinancing risk at maturity. Because the Revenue Ruling that makes DSTs 1031-eligible restricts the trustee from refinancing or renegotiating the existing loan, a leveraged DST generally must either refinance at maturity in the then-prevailing rate environment or sell the property. If interest rates are high when the loan matures, refinancing can be costly or unavailable, potentially forcing a sale at a poor time or price. Rising rates also pressure property values broadly, and any floating-rate debt adds immediate exposure because the interest cost rises with the market. These dynamics can squeeze the cash available for distributions. An all-cash, debt-free DST avoids this category of risk entirely, which the risk factors of such an offering will reflect.
So financing and interest-rate risks arise from leverage: the loan's terms, the inability to freely refinance, and exposure to rising rates create refinancing risk at maturity and pressure on distributions and value. Financing and interest-rate risks — disclosed through the loan's loan-to-value, fixed-versus-floating rate, and maturity, and centered on refinancing risk at maturity (because the trustee cannot freely refinance, a leveraged DST must refinance or sell into the prevailing rate environment), with rising rates also pressuring values and floating-rate debt adding immediate exposure — are the second major category, and they bear directly on distributions and the eventual sale. Debt-free DSTs sidestep them. Understanding these risks shows why a DST's debt structure deserves close reading. Financing and interest-rate risks stem from leverage — refinancing risk at maturity, rate sensitivity, and floating-rate exposure — and debt-free DSTs avoid them entirely.
Liquidity & Sponsor Risks
The third major category covers liquidity and sponsor risks — risks that stem from the DST structure itself rather than from the property or its financing. Liquidity risk is straightforward and fundamental: a DST interest is illiquid. There is no public market and no secondary market to speak of, so once you invest you generally cannot sell your interest and must hold until the sponsor sells the property, typically years later. If your circumstances change, you have very limited ability to access your capital. The PPM will state this plainly, and it is one of the most important risks for an investor to internalize before committing.
Sponsor risk is your dependence on the firm running the deal. The sponsor acquires the property, manages it, makes the operating and sale decisions, and ultimately determines whether capital comes back — and you, as a passive beneficial owner, cannot intervene. The risk factors disclose risks tied to the sponsor's competence, financial health, conflicts of interest, and the fees it charges. Related structural risks also appear here: the trustee restrictions that limit what the DST can do (the so-called 'seven deadly sins'), the possibility of a 'springing LLC' conversion if the trust must take action it otherwise cannot, and the risk that a structural misstep could cause the interest to lose its 1031 status. These are technical but material risks unique to the DST form.
So liquidity and sponsor risks come from the DST structure: your interest is illiquid with no secondary market, and you depend entirely on the sponsor's competence and integrity, plus the structural and tax constraints the form imposes. Liquidity and sponsor risks — the illiquidity of a DST interest (no public or secondary market, so you hold until the sponsor sells) and your dependence on the sponsor (its competence, finances, conflicts, and fees), together with structural and tax risks like the trustee restrictions, the springing-LLC mechanism, and the risk of losing 1031 status — are the third major category, arising from the DST form itself rather than the property. They are central to the passive, long-term nature of the investment. Understanding them completes the picture of the main risk categories. Liquidity and sponsor risks are structural: an illiquid interest with no secondary market, total dependence on the sponsor, and DST-specific tax and trustee constraints.
- The PPM's risk-factors section is essential reading — it is the honest catalogue of what could impair a private 506(c) DST offering, not boilerplate.
- Market and tenant risks (declining markets, vacancy, rent declines, tenant default) most directly threaten the distributions you are counting on.
- Financing and interest-rate risks (leverage, refinancing at maturity, rising and floating rates) bear on distributions and the eventual sale; debt-free DSTs avoid them.
- Liquidity and sponsor risks are structural — an illiquid interest with no secondary market, dependence on the sponsor, and DST-specific tax and trustee constraints.
Tax & Structural Risks
Beyond market, financing, and sponsor risks, the PPM discloses a set of tax and structural risks specific to the DST form — risks that go to the heart of why an exchanger uses a DST in the first place. The whole reason a DST works for a 1031 exchange is that, under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as a direct interest in real property. That treatment depends on the DST staying within strict limits — the trustee cannot renegotiate leases, refinance debt, reinvest sale proceeds, make substantial capital improvements, or take on new financing. If the trust were forced to step outside those limits, it could jeopardize the 1031 status investors depend on.
The PPM addresses how the structure handles this through mechanisms like the springing LLC: if circumstances require action the DST itself cannot take, the trust may convert to a limited liability company to manage the property, which preserves the property but can affect the tax treatment of investors who have not yet completed their exchange. Other structural and tax risks disclosed may include the risk that the IRS challenges the structure, the risk that tax law changes, and the dependence of the entire tax benefit on compliance with technical requirements. Because these risks are legal and technical, the PPM typically advises investors to consult their own tax and legal advisors — and Baker 1031 does not provide tax or legal advice.
So tax and structural risks address the foundation of the DST itself: the trustee restrictions, the springing-LLC mechanism, and the risk of losing the 1031 treatment that makes the investment worthwhile for an exchanger. Tax and structural risks — the dependence of a DST's 1031 eligibility on staying within the trustee restrictions, the springing-LLC conversion that may be triggered if the trust must take prohibited action (potentially affecting in-process exchanges), and the broader risks of IRS challenge, tax-law change, and technical non-compliance — are the category that goes to the heart of why the DST works. They are why investors must rely on their own tax and legal counsel. Understanding them completes the survey of the major risk categories before turning to how to read them critically. Tax and structural risks concern the DST form itself — the trustee restrictions, the springing LLC, and the risk of losing the 1031 treatment that justifies the structure.
The risk you cannot diversify away in a DST is the structure itself — the trustee restrictions and the tax treatment that make the whole strategy work depend on staying inside narrow lines.
How to Read Them Critically
Risk-factors sections share a lot of standard language across offerings, and that uniformity tempts investors to treat them as boilerplate. The skill is reading them critically — not just confirming the risks are disclosed, but identifying which of them are most material to this specific deal. Two DSTs may list nearly identical risk factors, yet one is an all-cash medical-office building leased to a strong-credit tenant on a long lease, while the other is a leveraged retail property with floating-rate debt maturing in three years and several leases rolling soon. The same words describe very different real exposures.
To read critically, connect each risk factor back to the specifics of the offering. For tenant risk, look at how concentrated the tenancy is, the lease terms, and the tenants' credit. For financing risk, look at the actual loan-to-value, whether the rate is fixed or floating, and when the loan matures relative to the expected hold. For market risk, consider the sector and location. For liquidity and sponsor risk, weigh the hold period and the sponsor's track record. The goal is to rank the risks by how likely and how impactful they are for this particular property, debt, and sponsor — and to ask the sponsor and your broker-dealer pointed questions where the disclosure is generic. Your broker-dealer's independent due diligence and the suitability and Regulation Best Interest framework are there to help, but the critical reading is ultimately yours to do.
So reading risk factors critically means translating standard disclosure into the real, specific exposures of this deal — ranking which risks actually matter most for this property, debt, and sponsor, and asking pointed questions. How to read risk factors critically — recognizing that much of the language is standardized, then connecting each risk back to the offering's specifics (tenant concentration and lease terms for tenant risk; loan-to-value, fixed-versus-floating, and maturity for financing risk; sector and location for market risk; hold period and sponsor track record for liquidity and sponsor risk) to rank the risks most material to this deal and pose pointed questions — is the skill that turns the PPM from boilerplate into a real assessment. Your broker-dealer's diligence and the suitability framework support you, but the critical reading is yours. Reading risk factors critically means mapping generic disclosure onto this deal's specifics to find the risks that genuinely matter most.
How Baker 1031 Helps You Read DST Risk Factors
Baker 1031 Investments helps investors read the risk-factors section of a DST private placement memorandum — understanding why it matters, the market and tenant risks, the financing and interest-rate risks, the liquidity and sponsor risks, the tax and structural risks, and how to read them critically — so you can identify which risks are most material to a specific offering before you invest.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), as Regulation D 506(c) private placements to accredited investors, after a suitability review and consistent with Regulation Best Interest. We help you work through a PPM's risk factors, connect the standard disclosures to the offering's actual property, debt structure, and sponsor, and ask pointed questions where the risks are most material. Baker 1031 does not provide tax or legal advice; the DST's tax and structural risks — its 1031 eligibility, the trustee restrictions, and the springing-LLC mechanism — are matters for your CPA and attorney, and the PPM itself advises consulting your own advisors. We are candid that DSTs carry real, disclosed risks and that distributions and returns are never guaranteed — projections are assumptions, not promises, and past performance does not guarantee future results. Our role is to help you read the risk factors clearly, weigh them honestly, and invest only when an offering is suitable for your goals and risk tolerance.
Frequently Asked Questions
What is a DST private placement memorandum (PPM)?
A private placement memorandum, or PPM, is the central disclosure document for a Delaware Statutory Trust offering. Because DSTs are sold as private Regulation D 506(c) securities to accredited investors rather than as registered public offerings, the PPM is where the sponsor discloses everything an investor needs to evaluate the deal: the property and its financials, the business plan, the loan terms, the fees and load, the sponsor's background, the tax treatment, and — critically — the risk factors. It is a detailed legal document, often running well over a hundred pages, and it is meant to be read in full before investing. The risk-factors section is the part that lays out, honestly and specifically, what could go wrong. So the PPM is the offering's complete disclosure package, and reading it — especially the risk factors — is an essential part of due diligence. Your broker-dealer can help you work through it, and the PPM typically advises consulting your own tax and legal advisors on the technical points.
Why is the risk-factors section so important?
The risk-factors section is the most important part of the PPM for an investor because it is the honest catalogue of everything that could impair the investment — and because a DST is illiquid, passive, and long-term, you have very limited ability to react once you are in. The risks it discloses are not abstractions; they are the specific ways your distributions could fall, your capital could be impaired, or your 1031 tax deferral could be jeopardized. Reading the risk factors before you invest is your main opportunity to understand the downside while you can still decide not to proceed. Many investors skim this section as legal boilerplate, but that is a mistake — buried in the standard language are the risks that are genuinely material to this specific property, debt, and sponsor. So treat the risk-factors section as essential reading, not a formality. It exists because these are real investments with real downside, sold to accredited investors precisely because they are not appropriate for everyone.
What are the main categories of DST risk?
DST risk factors generally fall into a few major categories. Market and tenant risks cover the property and the rent that funds your distributions — declining markets, oversupply, falling rents and values, and tenant-specific problems like vacancy, rent declines at renewal, and tenant default. Financing and interest-rate risks apply to leveraged DSTs — the loan's terms, refinancing risk at maturity, rising rates, and floating-rate exposure. Liquidity and sponsor risks stem from the structure — the illiquidity of a DST interest with no secondary market, and your dependence on the sponsor's competence, finances, and integrity. Tax and structural risks go to the DST form itself — the trustee restrictions, the springing-LLC mechanism, and the risk of losing 1031 status. So the main categories are market/tenant, financing/interest-rate, liquidity/sponsor, and tax/structural. A thorough risk-factors section will address each, and reading critically means identifying which of these matter most for the specific offering in front of you.
What are market and tenant risks in a DST?
Market risk is the possibility that broad conditions in the property's sector or region deteriorate — oversupply, weakening demand, falling rents, or declining property values — which can reduce the income the DST produces and the price it eventually sells for. Because a DST typically holds one property or a small portfolio, it is exposed to its specific market rather than a broadly diversified pool. Tenant risk is the more granular version: since your distributions come from tenants paying rent, anything that interrupts that rent threatens your cash flow. The PPM discloses risks such as vacancy (space sitting empty), rent declines at lease renewal, and tenant default or bankruptcy. The severity depends on the structure — a single-tenant net-lease property has concentrated, binary risk (one default can mean zero income), while a multi-tenant property spreads risk but needs more management. Lease terms and tenant credit also matter. So market and tenant risks are the property-level risks that most directly threaten the distributions you are counting on.
What are financing and interest-rate risks in a DST?
Financing and interest-rate risks apply to DSTs that use leverage — non-recourse debt secured by the property, often used so an exchanger can replace the mortgage from their relinquished property. The PPM discloses the loan's loan-to-value, its interest rate and whether it is fixed or floating, and its maturity date. The central concern is refinancing risk at maturity: because the Revenue Ruling that makes DSTs 1031-eligible restricts the trustee from refinancing the loan, a leveraged DST generally must refinance at maturity in the then-prevailing rate environment or sell the property. If rates are high at maturity, refinancing can be costly or unavailable, potentially forcing a sale at a poor time or price. Rising rates also pressure property values broadly, and floating-rate debt adds immediate exposure. These dynamics can squeeze the cash available for distributions. An all-cash, debt-free DST avoids this entire category. So financing and interest-rate risks stem from leverage and are why a DST's debt structure deserves close reading.
What are liquidity and sponsor risks in a DST?
Liquidity and sponsor risks arise from the DST structure itself rather than from the property or its financing. Liquidity risk is fundamental: a DST interest is illiquid, with no public or meaningful secondary market, so once you invest you generally cannot sell and must hold until the sponsor sells the property, typically years later. If your circumstances change, you have very limited ability to access your capital. Sponsor risk is your dependence on the firm running the deal — the sponsor acquires, manages, and ultimately sells the property and determines whether capital comes back, and you, as a passive owner, cannot intervene. The risk factors disclose risks tied to the sponsor's competence, financial health, conflicts of interest, and fees. Related structural risks also appear here, including the trustee restrictions, the springing-LLC mechanism, and the risk of losing 1031 status. So liquidity and sponsor risks are the structural risks of the DST form — an illiquid interest and total reliance on the sponsor — which is why illiquidity tolerance and sponsor due diligence matter so much.
What are the tax and structural risks in a DST PPM?
Tax and structural risks are specific to the DST form and go to the heart of why an exchanger uses a DST. The strategy works because, under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as a direct interest in real property — but that treatment depends on the trust staying within strict limits. The trustee cannot renegotiate leases, refinance debt, reinvest sale proceeds, make substantial improvements, or take on new financing (the so-called 'seven deadly sins'). If the trust were forced outside those limits, it could jeopardize the 1031 status investors depend on. The PPM addresses how the structure handles this through the springing LLC — a conversion to an LLC if the trust must take action it otherwise cannot, which preserves the property but can affect the tax treatment of in-process exchanges. Other risks include IRS challenge and tax-law change. Because these are legal and technical, the PPM advises consulting your own tax and legal advisors. So tax and structural risks concern the foundation of the DST itself.
What does it mean to read risk factors critically?
Reading risk factors critically means going beyond confirming that the risks are disclosed and instead identifying which of them are most material to the specific deal in front of you. Risk-factors sections share a lot of standard language across offerings, which tempts investors to treat them as boilerplate — but the same words can describe very different real exposures. Two DSTs may list nearly identical risk factors, yet one is an all-cash building leased to a strong-credit tenant on a long lease, while the other is a leveraged property with floating-rate debt maturing soon and leases rolling over. To read critically, connect each risk factor back to the offering's specifics: tenant concentration and lease terms for tenant risk; loan-to-value, fixed-versus-floating, and maturity for financing risk; sector and location for market risk; hold period and sponsor track record for liquidity and sponsor risk. Then rank the risks by likelihood and impact for this particular deal, and ask pointed questions where the disclosure is generic. So reading critically turns the PPM from boilerplate into a real, deal-specific assessment.
What is a Regulation D 506(c) offering?
Regulation D 506(c) is the exemption under federal securities law that lets a sponsor raise capital from investors without registering the offering with the SEC, provided certain conditions are met. Under 506(c), the sponsor may generally solicit and advertise the offering publicly, but all investors must be accredited, and the sponsor must take reasonable steps to verify each investor's accredited status — not merely accept self-certification. DSTs are commonly offered as 506(c) private placements, which is why they are limited to accredited investors and why the PPM, rather than an SEC-registered prospectus, is the disclosure document. Because these are private securities, they are illiquid and carry the risks the PPM discloses, and they are sold through broker-dealers subject to suitability and Regulation Best Interest. So a 506(c) offering is a private, accredited-only securities offering with public solicitation permitted but accreditation verification required. Understanding that a DST is a 506(c) offering explains why it is accredited-only, why the PPM matters so much, and why a suitability review precedes any investment.
Do all DSTs carry interest-rate risk?
No — interest-rate risk depends on whether the DST uses leverage. A leveraged DST carries non-recourse debt, and that debt is the source of interest-rate and refinancing risk: the loan must eventually be refinanced or the property sold into the prevailing rate environment, and because the trustee cannot freely refinance, a high-rate environment at maturity can be costly or force a poorly timed sale. Floating-rate debt adds immediate exposure as rates move. An all-cash, debt-free DST, by contrast, carries no loan at all, so it has no refinancing risk and no direct interest-rate exposure on debt — its risk factors will reflect the absence of financing risk. That makes debt-free DSTs a hedge against interest-rate risk, at the cost of lower potential yield and the inability to replace mortgage debt in an exchange. So not all DSTs carry interest-rate risk; the answer turns on the deal's debt. When you read a PPM's financing risk factors, check the actual loan terms — or confirm the offering is all-cash — to know how much rate risk applies.
What is a springing LLC?
A springing LLC is a structural mechanism built into a DST to handle situations the trust itself is not permitted to manage. Because a DST's 1031 eligibility depends on the trustee staying within strict limits — no refinancing, no new leasing, no reinvestment of proceeds, no major improvements — there are circumstances, such as a major tenant default requiring active re-leasing or a needed loan modification, that the DST legally cannot address while remaining a DST. The springing LLC is the contingency: the trust can convert into a limited liability company that has the flexibility to take those actions and preserve the property. The trade-off is tax: a conversion can affect the 1031 treatment of investors who have not yet completed their exchange, because an LLC interest is treated differently from a direct real-property interest. The PPM discloses the springing-LLC mechanism as a structural risk. So a springing LLC protects the property in a crisis but can have tax consequences, which is why it appears in the risk factors and why timing matters for exchangers.
Does the PPM guarantee any returns?
No — a PPM does not guarantee any returns, and its risk-factors section makes that explicit. Any distribution rates or total-return figures presented in a DST offering are projections based on assumptions about rents, occupancy, expenses, financing, and an eventual sale price — they are estimates of what might happen, not promises of what will. The risk factors disclose precisely why those projections may not be achieved: markets and tenants can disappoint, financing can become problematic, and the property may sell for less than expected. Distributions can be reduced or suspended, and you could lose some or all of your invested capital. Past performance of the sponsor or similar properties does not guarantee future results. So nothing in the PPM should be read as a guarantee — projections are assumptions, and the risk factors are the counterweight that explains how reality could differ. Read the projections and the risk factors together, and treat any DST investment as carrying genuine downside, sized appropriately within your overall portfolio.
How do market and financing risks interact?
Market and financing risks often compound, which is why reading them together matters. Rising interest rates, for example, are a financing risk — they raise borrowing costs and create refinancing risk at maturity — but they are also a market risk, because higher rates tend to pressure property values across the board. So a leveraged DST facing a loan maturity in a high-rate environment may confront both a costly refinancing and a property worth less than expected at the same time, a difficult combination. Similarly, a weak market that depresses rents and occupancy (a market and tenant risk) reduces the cash flow available to service debt, increasing financing strain. The interaction is why a leveraged DST's risk profile is more sensitive to a downturn than an all-cash DST's: leverage amplifies both the upside and the downside of market movements. So when you read a PPM, do not treat the risk categories in isolation — consider how a weak market and a debt maturity could coincide. Understanding the interaction helps you judge how resilient an offering is to adverse conditions.
Should the risk factors stop me from investing in a DST?
Not by themselves. The presence of risk factors is normal and expected — every legitimate DST PPM contains a detailed risk-factors section, because these are real investments with real downside, and full disclosure is required. The point of reading them is not to find a deal with no risks (there is no such thing) but to understand the risks clearly, judge which are most material to the specific offering, and decide whether they are acceptable given your goals, time horizon, and risk tolerance. A well-disclosed risk you understand and can tolerate is very different from a risk you did not see coming. So use the risk factors to make an informed decision, not to disqualify every offering. Some risks may be ones you are comfortable bearing; others may be deal-breakers for your situation. The suitability review and your broker-dealer's Regulation Best Interest obligations are designed to help confirm an offering fits you. So let the risk factors inform your decision rather than reflexively stop it — understanding risk is the goal, not avoiding all of it.
How does Baker 1031 help me read DST risk factors?
We help investors read the risk-factors section of a DST private placement memorandum — understanding why it matters, the market and tenant risks, the financing and interest-rate risks, the liquidity and sponsor risks, the tax and structural risks, and how to read them critically — so you can identify which risks are most material to a specific offering before you invest. DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), as Regulation D 506(c) private placements to accredited investors, after a suitability review and consistent with Regulation Best Interest. We help you work through a PPM's risk factors, connect the standard disclosures to the offering's actual property, debt, and sponsor, and ask pointed questions where the risks are most material. Baker 1031 does not provide tax or legal advice; the DST's tax and structural risks are matters for your CPA and attorney. We are candid that DSTs carry real, disclosed risks and that distributions and returns are never guaranteed. Our role is to help you read the risk factors clearly and invest only when an offering is suitable for you.
Glossary
- Private Placement Memorandum (PPM)
- The central disclosure document for a private DST offering.
- Risk Factors
- The PPM section disclosing the material risks of the offering.
- Regulation D 506(c)
- The exemption allowing private, accredited-only securities offerings with verification.
- Accredited Investor
- An investor meeting income or net-worth thresholds for private offerings.
- Market Risk
- The risk that sector or regional conditions reduce income and value.
- Tenant Risk
- The risk that vacancy, rent declines, or default cut rental income.
- Refinancing Risk
- The risk of refinancing a maturing DST loan in a poor rate environment.
- Loan-to-Value (LTV)
- The loan amount as a percentage of the property's value.
- Floating-Rate Debt
- A loan whose interest rate moves with the market.
- Liquidity Risk
- The risk from a DST interest's illiquidity and lack of secondary market.
- Sponsor Risk
- The risk from dependence on the sponsor's competence and integrity.
- Trustee Restrictions
- The limits a DST trustee must observe to keep 1031 eligibility.
- Springing LLC
- A contingency converting a DST to an LLC to manage a crisis.
- Non-Recourse Debt
- A loan secured only by the property, not the investors personally.
- Regulation Best Interest
- The SEC standard governing broker-dealer recommendations.
- Revenue Ruling 2004-86
- The IRS ruling making DST interests 1031-eligible real property.
Sources & References
- IRS. Revenue Ruling 2004-86 — Delaware Statutory Trusts and Section 1031
- U.S. Securities and Exchange Commission. Investor Bulletin: Accredited Investors
- FINRA. Real Estate Investments
- U.S. Securities and Exchange Commission. Regulation Best Interest
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
