What Are the Risks of Delaware Statutory Trusts (DSTs) That Every Landowner Should Understand?

A Delaware Statutory Trust can be a useful way for farmers, ranchers, and landowners to sell property, use a 1031 exchange to defer taxes, and collect potential income without dealing with day-to-day management. But DSTs are not without risk. Just like owning a ranch comes with uncertainty, weather, markets, livestock, DSTs carry their own challenges.

1031 exchanges and Delaware Statutory Trusts available through private placements are highly speculative, illiquid securities and involve substantial risk, including the possible loss of all principal invested.

Risk 1: Illiquidity, your money is tied up

DSTs are considered illiquid investments. Once you put money in, plan to keep it there until the trust ends, usually 5 to 10 years. There is no public market for DST units and no guaranteed way to sell early.

How we help. While DSTs are technically illiquid, in certain cases other accredited investors have been interested in buying units before the trust ends. Whether a sale happens, how long it takes, and at what price all depend on timing and demand, and none of it is guaranteed. We advise clients to treat DSTs as long-term investments, with any early sale viewed as a possibility, not a certainty.

Risk 2: Loss of control, you’re not the manager

With a DST, you give up control. The sponsor, not you, makes decisions about tenants, financing, upkeep, and when to sell.

How we help. Choose sponsors with long histories of steady performance. We review years of sponsor operating history. Many of the sponsors we work with have operated for decades and are known for conservative management. We pair industry insight with a careful, numbers-based due diligence process. This reduces, though doesn’t remove, the risk of handing control to someone else.

Risk 3: Market and property risk, values can go down

DSTs own real estate, and real estate can go up or down. A weak local economy, rising expenses, or losing tenants can reduce potential income and property value.

How we help. We are very selective. Many of the DSTs on the market do not make it through our due diligence process. The ones we bring forward are those we believe show stronger fundamentals.

We focus on property types that tend to hold up well over time:

• Multifamily apartments
• Self-storage
• 55+ communities
• Multi-tenant industrial
• Student housing
• Senior housing

We also encourage spreading investments across different property types and regions, so if one has trouble, the others may help balance things out. No one can predict markets, and there is always some risk.

Risk 4: Sponsor risk, who you partner with matters

The sponsor runs the deal. If they mismanage, take on too much risk, or project potential outcomes that don’t hold up, potential income can suffer.

How we help. We dig into each sponsor’s financials, past results, and management style. We typically recommend sponsors who, in our view, have shown discipline and consistency over time. This doesn’t eliminate the risk, but it increases the likelihood that clients are working with experienced operators who have handled different market conditions before.

Risk 5: Fees and expenses, no hidden surprises

DSTs usually include upfront costs and ongoing fees for structuring, managing, and operating the property. Compared to direct ownership, these fees can reduce potential outcomes.

How we help. We review and compare fees across offerings and explain them in plain English. Fees are clearly laid out in the Private Placement Memorandum (PPM), no hidden surprises. Just as important, the projected potential outcomes you see are already net of fees. You don’t write us a separate check; the costs are built into the investment itself. We only recommend DSTs where, in our view, the projected potential outcomes justify the costs.

Risk 6: Debt risk, borrowing cuts both ways

Many DSTs use debt. Debt can boost potential outcomes when things go well, but magnify losses if they don’t. Interest rate changes or refinancing can add risk.

How we help. We typically approve DSTs with about a 50% loan-to-value (LTV) ratio, which we consider conservative. Much of the debt in the offerings we review is non-recourse financing, often from agency or institutional lenders, though the loan terms vary by offering and are disclosed in the PPM. The lender has done its own underwriting before putting the loan in place, an added layer of scrutiny.

Using this type of financing also replaces recourse debt with non-recourse debt, which removes personal liability for the investor. While debt always adds risk, conservative leverage with fixed-rate terms helps bring more stability.

Are DSTs a safe investment?

DSTs can offer tax deferral, estate planning benefits, and the possibility of potential income. But they are not risk-free. They are long-term investments, they carry fees, they rely on sponsor management, and they’re subject to property market ups and downs.

We believe in being upfront about these risks. That’s why we use a selective approval process, draw on decades of industry relationships, and apply careful due diligence. The goal is to help clients understand both the benefits and the risks, and to invest in DSTs that, in our view, represent stronger opportunities in the market.

1031 exchanges and Delaware Statutory Trusts available through private placements are highly speculative, illiquid securities and involve substantial risk, including the possible loss of all principal invested. Complexity and restrictions within a 1031 exchange program may significantly impact desired tax deferral outcomes. Potential monthly income from such investments is not guaranteed and distributions may be reduced or suspended. DST 1031 properties are only available to accredited investors and accredited entities. This material has been prepared for educational purposes only, is not to be interpreted as tax or legal advice, and does not constitute an offer to sell securitized real estate investments. Investors are advised to speak with their own tax and legal advisors regarding their particular situation. Securities offered through Arkadios Capital, LLC, Member FINRA / Member SIPC. Advisory Services through Arkadios Wealth. Iron Ridge and Arkadios do not share any ownership.