At Cornerstone Real Estate Investment Services, we prioritize conducting comprehensive due diligence on every potential DST offering before presenting it to investors. Our broker-dealer and sponsors work together to ensure that all syndicated DST investments offered through Cornerstone pass through four levels of due diligence. The first three levels are performed by the sponsor, lender, and sponsor’s legal counsel, while the fourth level is conducted by the broker-dealer.
The sponsor diligently searches the national real estate market for stabilized investment-grade properties. They conduct extensive due diligence on each potential property candidate. As the issuer of a private securities offering, the sponsor could be held liable for any material misrepresentation or omission in connection with the offer or sale of the property. Therefore, the sponsor must prove that they conducted a reasonable investigation and had a reasonable basis to believe that there were no material misrepresentations or omissions. The sponsor’s acquisition team thoroughly vets the property by commissioning appraisals, environmental studies, and property condition assessments. They also complete real estate and financial underwriting for the property. Independent third-party due diligence firms provide reports on the property and offering. If the results of the due diligence are satisfactory, the sponsor acquires or contracts to purchase the property, initiating the DST offering.
Once the sponsor identifies a property for acquisition, they arrange non-recourse debt financing with a lender. The lender conducts their own due diligence on the property before approving the loan. They confirm the property value through appraisals, assess environmental risks through reports, determine necessary reserves for property maintenance, and analyze the property’s net operating income. The lender adjusts the net operating income based on factors such as vacancy and credit risk. They also consider loan-to-value ratio and debt service coverage ratio in their underwriting criteria.
After negotiating the debt side of the offering, the sponsor structures the equity side through a private placement offering. They hire legal counsel to draft a private placement memorandum (PPM) that discloses all risks and material facts related to the offering. Legal counsel conducts their own due diligence on the property and offering. While attorneys are not directly obligated to ensure the accuracy of a prospectus, they may be held liable for negligent misstatements or omissions. Legal counsel also provides a tax opinion comparing the DST to IRS regulations for 1031 exchanges.
Once the PPM is prepared, it is presented to a FINRA member securities broker-dealer. The broker-dealer conducts their own due diligence study on the sponsor and property before signing a selling agreement. They investigate the offering document for false or misleading information, conduct background checks on the sponsor’s principals, review agreements, inspect the property, and assess the likelihood of projections. The broker-dealer’s due diligence analysts independently review the offering materials and third-party reports. They compare property-level data to historical data and market trends. They also analyze the sponsor’s fee structure and review the legal and operative documents for completeness and consistency. After thorough examination, the findings are presented to an investment committee for potential approval.