There are five key players involved in a DST offering that is suitable for a 1031 exchange:

 

1. The Sponsor
A nationally recognized real estate firm with a proven track record in acquiring, managing, and selling commercial properties.

 

2. The Lender
A major institutional lender that provides non-recourse debt financing at competitive interest rates.

 

3. The Attorney
A reputable law firm, such as Baker & McKenzie or Luce Forward, that ensures all legal aspects of the offering are properly addressed and discloses any risks or material facts in a Private Placement Memorandum (PPM).

 

4. The Broker/Dealer
A securities brokerage that is a member of FINRA and SIPC, providing an additional layer of protection for investors. They conduct their own due diligence on the sponsor and the property before signing a selling agreement.

 

5. The Investor
Accredited individuals, partnerships, LLCs, S corporations, or C corporations who are interested in participating in the DST offering.

The DST offering follows a five-step process:

Step 1: Sponsor Due Diligence – The sponsor conducts thorough research in the national real estate market to identify attractive investment-grade properties. They perform extensive due diligence on each potential property before acquiring or contracting to purchase it.
Step 2: Debt Financing Arrangement – Once the sponsor selects a property, they arrange non-recourse debt financing with a major lender. The lender also conducts due diligence on the property. The loan is initially made to the sponsor but is eventually assumed by the investors based on their proportionate share of the offering. Loan repayments are made by either the property manager or the sponsor.
Step 3: Preparation of the Private Placement Memorandum – After negotiating the debt side of the offering, the sponsor structures the equity side through a private placement offering. They engage a reputable law firm to draft a comprehensive PPM that discloses all risks and material facts related to the offering.
Step 4: Selling Agreement – Once the PPM is prepared, along with all underwriting information, it is presented to a FINRA member securities broker-dealer. The broker-dealer conducts its own due diligence on the sponsor and the property before signing a selling agreement, providing additional protection for investors.
Step 5: Presentation to Prospective Investors – With the selling agreement in place, licensed registered representatives of the broker-dealer can present the offering to prospective investors. This ensures that investors receive accurate and reliable information about the DST offering.