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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
To read a DST offering, follow the money from the property purchase through annual operations and the final sale. Reconcile the fees, debt, reserves, and investor payments before comparing any headline percentage.
An offering can show a purchase price, a total offering price, a loan-to-value ratio, a cap rate, and a cash-flow rate. Each number may be correct while measuring something different. The challenge is to understand what sits above and below each line.
This walkthrough uses one fictional example. Its figures are chosen to explain the math, not to describe an available investment or suggest a normal return. Actual documents, loan terms, allocation methods, and tax rules control a real purchase.
Start with the offering memorandum's summary, sources and uses, fee schedule, debt section, cash-flow forecast, and sale assumptions. Keep the risk section nearby. A number in the summary may depend on a condition explained much later.
Build a worksheet with four columns: amount, definition, source page, and open question. Add a date to each source. Do not mix an old debt quote with a revised purchase price or a forecast based on a different property set.
Ask what is final and what can still change. If a loan has not closed, its projected rate is different from an executed rate. If a reserve amount is preliminary, your model should not treat it as funded cash.
The SEC cautions that private offerings may provide limited information and that a PPM generally is not reviewed by a regulator. A completed worksheet can make the documents clearer, but it cannot certify the investment or remove its risks. [1]
Sources show where money comes from. Uses show where it goes at the start. The two totals should match, with each material item explained. This is the first check because later return calculations depend on what investors actually paid.
Assume our fictional DST has these opening figures:
| Sources | Amount | Uses | Amount |
|---|---|---|---|
| Investor equity | $12,000,000 | Property purchase | $20,000,000 |
| Property loan | $10,000,000 | Funded reserves | $800,000 |
| Fees and closing costs | $1,200,000 | ||
| Total sources | $22,000,000 | Total uses | $22,000,000 |
The $22 million total is not the same as the property's $20 million purchase price. Investors supply $12 million because their cash funds part of the purchase and the other listed uses. That difference matters when evaluating price and the amount needed to return investor capital.
Do not call the entire $2 million difference a fee. The $800,000 reserve remains a pool of cash subject to its permitted uses. The $1.2 million combines fees and costs that should be broken into separate line items in a real review.
Nor should you ignore the difference because some of it is a reserve. The money still came from investors, and its later use affects their outcome.
Ask for the $1.2 million in our example to be split by purpose and recipient. A real schedule might include several kinds of charges, but you should not assume a category is present until the documents show it.
For each percentage, write its calculation base. A 1% charge on a $20 million property equals $200,000. A 1% charge on $12 million of equity equals $120,000. The same printed percentage can represent very different dollars.
Next, identify when the amount is paid. An initial charge, annual charge, and sale charge should not be placed in one column as if they all occur once. Ask whether a charge is already included in another budget line to avoid counting it twice.
Related-party payments deserve the same clear treatment as payments to outside firms. A shared brand does not tell you whether the price is reasonable or whether one fee replaces another.
Write down what service or right the fee buys. Then consider the effect across several outcomes. A fixed cost consumes a larger share of a weak result than of a strong one, even if its dollar amount never changes.
Loan-to-value, or LTV, is debt divided by a stated value. The word “value” needs a definition. It could refer to an appraisal, purchase price, or another base used in the offering.
Using purchase price in our example, $10 million of debt divided by $20 million gives 50%. Using total sources of $22 million gives about 45.45%. These describe different relationships. Adding costs to the denominator does not create more building collateral for the lender.
The OCC's lending handbook discusses LTV along with cash flow, debt service, and property value. It emphasizes the underlying analysis rather than treating a single ratio as a complete measure of risk. This is banking guidance, not an approval standard for a DST. [2]
For exchange planning, obtain the actual share of debt and value allocated to the interest you would acquire. Do not substitute the lender's ratio for the issuer's allocation schedule. Your tax adviser must reconcile that schedule with your sale, debt relief, and other exchange facts.
Also ask whether the published ratio includes all debt. A senior loan ratio alone may not describe every claim ahead of investor equity.
Our example assumes a $10 million interest-only loan at 5%, producing $500,000 of annual interest. That is a teaching assumption, not a suggested loan structure. We will keep the balance unchanged to make later calculations clear.
For an actual offering, list the payment amount, fixed or floating rate, maturity, interest-only end date, and any scheduled principal payments. A long amortization period does not necessarily mean a loan has a long maturity.
Read prepayment costs, extension conditions, cash controls, and financial covenants. A loan can restrict distributions before the property misses a payment. Ask what triggers the restriction and what must happen for cash to be released.
If principal payments begin later, they reduce current cash while lowering the loan balance. The two effects belong in different parts of the model. Do not describe principal reduction as an investor cash payment.
Finally, compare loan dates with lease dates and the proposed sale. The plan needs a workable response if the property cannot sell on schedule. Do not assume refinancing is freely available to the trust.
The operating forecast should connect potential rent to the amount expected to be collected. Look for vacancy, concessions, unpaid rent, and other deductions. An occupied unit with free rent does not generate the same current cash as a fully paying unit.
Compare the forecast with recent actual results. Ask which differences come from signed leases, which come from expected new leases, and which depend on changes in the market. Keep one-time income separate from recurring income.
For a master-lease structure, determine whether the forecast shows property operations, master-tenant payments to the trust, or both. Those are different layers. The trust's scheduled receipts may depend on another entity's resources.
The OCC describes the importance of historical, current, and projected rents and expenses, lease terms, and stressed conditions. It also notes that definitions used in loan covenants can differ from other underwriting measures. Read the definition attached to each schedule. [2]
A useful question is, “Which change produces most of the expected income growth?” If the answer is a higher rent assumption, inspect the evidence behind it rather than accepting the final total.
Net operating income, or NOI, measures income after the operating expenses included in its definition. It is not automatically the cash investors receive. Debt service, trust costs, capital needs, and retained cash can sit below that line.
Assume our fictional property produces $1.3 million of NOI for a full year. For this example, it is before debt service, trust-level costs, and the additional reserve contribution shown below. We assume no overlapping expense is counted twice.
| Annual cash bridge | Amount |
|---|---|
| Property NOI | $1,300,000 |
| Less debt service | ($500,000) |
| Less trust-level costs | ($100,000) |
| Less added reserves | ($100,000) |
| Cash remaining | $600,000 |
Dividing $600,000 by $12 million of investor equity gives a 5% cash-flow rate. Dividing the same amount by the property's $20 million price would answer a different question. Use the investor equity base when evaluating cash paid on that equity.
This bridge assumes all remaining cash can be paid. Actual documents may allow further retention or impose limits. Ask which approvals or lender conditions stand between available cash and a distribution.
Our opening budget includes $800,000 of funded reserves. Our annual cash bridge adds $100,000. Those are separate flows: cash set aside at the start and cash retained from later operations.
Suppose $150,000 is spent from reserves during the first year. Starting with $800,000, adding $100,000, and spending $150,000 leaves $750,000, before interest or any other movement. That ending balance should agree with the reserve schedule.
If the forecast pays an expense from reserves, check whether it also deducts that same expense from current cash elsewhere. Double counting makes the result look worse than it is. Leaving the expense out of both places makes it look better.
A reserve release can support a cash payment, but it is not fresh operating income. Ask how much of the distribution depends on releasing money investors supplied earlier.
Also separate restricted reserves from flexible cash. A lender-controlled account for one purpose may not be available to cover another problem. The total bank balance alone does not show how much cash the trust can use.
Assume all equity interests share proportionally and you invest $100,000 of the $12 million total. Your fraction is one divided by 120, or about 0.8333%. A real offering may use different units or allocation details, so confirm its schedule.
Under our simplified assumptions, that fraction of the $600,000 annual cash amount equals $5,000. If paid evenly each month, it would be about $416.67. Monthly timing is not promised; it is just an arithmetic conversion.
The same fraction of the $10 million loan is about $83,333.33. Your equity plus that debt allocation equals about $183,333.33. That figure is not the same as your share of the $20 million property purchase price, which is about $166,666.67.
The difference reflects the funded reserves and costs in the opening capitalization. Do not decide tax basis or qualifying replacement value from this simplified model. Those require the actual allocations and tax treatment of each item.
The IRS's Form 8824 instructions address property values, liabilities, cash, recognized gain, and basis in an exchange. Ask your CPA to apply those rules to the final records. An online LTV number is not a substitute for that work. [3]
Reduce the example's NOI by 10%, from $1.3 million to $1.17 million. Leave debt service, trust costs, and added reserves unchanged. The cash remaining falls from $600,000 to $470,000.
On $12 million of equity, that is about 3.92% rather than 5%. The 10% change in NOI produces a larger percentage change in the remainder because several costs stay fixed.
For the $100,000 investor, the simplified annual amount falls from $5,000 to about $3,916.67. This is not a worst-case estimate. It tests one assumption while holding the rest constant.
Next, try changes that fit the property: longer downtime, higher insurance, a major repair, or the start of principal payments. Some changes interact. A departing tenant can reduce income and require spending at the same time.
Label these scenarios as calculations, not probabilities. Unless you have a sound basis, do not claim that a particular outcome has a certain chance of occurring. The exercise shows sensitivity, not certainty.
A projected sale price needs its own bridge. Assume future annual NOI is $1.5 million and a buyer uses a 6% cap rate. A simple capitalization calculation gives a $25 million price.
For this illustration, selling costs are 3% of price, or $750,000. Deduct those costs and the unchanged $10 million loan. The amount left is $14.25 million, before other adjustments, taxes, or any reserve balance.
Now use a 7.5% exit cap rate with the same $1.5 million NOI. The estimated price becomes $20 million. After $600,000 of selling costs and the same loan, $9.4 million remains.
The property earned the same modeled income in both cases. The price paid for that income changed. That difference can decide whether the final proceeds exceed the original $12 million of investor equity.
Check whether the forecast uses the final hold year's NOI or the next year's projected NOI. Either convention needs to be stated clearly. Do not compare two sale models using different income years as if the cap rate were the only difference.
Check the timing convention as well. A first-year schedule may begin on a fixed calendar date, while your own ownership starts later. A full-year rate is not the same as cash earned over a partial year. Ask whether payments are prorated, when the first payment begins, and whether any closing adjustment affects it. Keep those details out of the headline annual comparison until you can put both offerings on the same basis. Otherwise, a timing difference may look like an economic advantage that does not exist.
A 5% distribution rate describes a cash payment relative to a stated base over a stated period. It does not say whether principal will be returned. A property value estimate does not say when you can turn your interest into cash.
Total investment performance includes cash received during ownership and the amount received at exit, compared with cash invested. Timing also matters. A dollar returned sooner and a dollar returned much later do not have the same economic effect.
Ask whether return figures are before or after sponsor fees, selling compensation, and investor taxes. A gross property return should not be presented as if it were the net return on your subscription.
Taxable income is another measure. Depreciation, basis, and other tax items can make taxable income differ from the amount distributed. Avoid treating every cash payment as either fully taxable profit or tax-free income without your CPA's analysis.
A clear comparison keeps each measure in its own row with a definition. It does not try to make one impressive number stand in for the whole investment.
Finish with five checks: sources equal uses; debt payments match the loan schedule; cash payments match their funding sources; reserve balances roll forward; and sale proceeds include costs and debt payoff.
Then list what the model does not answer. A perfect spreadsheet cannot prove the rent assumptions, property condition, tenant credit, or future buyer demand. Those need evidence outside the arithmetic.
FINRA's private-placement guidance addresses the need for member firms to investigate an offering's claims and supporting information before making recommendations. A sponsor's projection alone does not resolve that task. Ask what work supports the few assumptions that drive most of the modeled outcome. [4]
If the figures cannot be reconciled, request a written explanation before proceeding. The issue might be a harmless definition difference, an outdated schedule, or a material gap. You need to know which.
It may fund reserves, fees, closing costs, and other disclosed uses beyond the price paid for the real estate. Review the actual sources-and-uses schedule. Do not label the entire difference a fee, but do include it when assessing the capital investors must recover over the life of the investment.
Use the ratio that answers the question you are asking, and label its base. Property leverage, lender collateral coverage, and an investor's allocated exchange debt are related but different measures. Obtain the actual debt allocation for exchange planning. A percentage without its definition is incomplete information.
No. Debt service, trust costs, capital needs, and retained reserves can reduce the amount available to investors. Definitions vary, so trace each cost once and avoid double counting. Ask for a bridge from the stated NOI to the planned payment on your equity.
It can leave more current cash available than a loan with principal payments, all else equal. But the debt is not being paid down during that period, and maturity risk remains. Evaluate current cash and the remaining balance together. A larger distribution is not enough to establish a better total outcome.
That depends on the documents and restrictions on the cash. If permitted, a reserve release can help fund a payment without increasing current operating income. Ask for the source of each payment and the remaining reserve balance. Money paid out is no longer available for its other potential uses.
In a simple income-capitalization model, value equals NOI divided by the cap rate. Holding NOI constant, a larger divisor produces a lower value. Actual sale pricing depends on more factors, but this calculation shows why a forecast can be sensitive to the assumed market at exit.
No. It leaves out actual tax allocations, basis, closing adjustments, and personal facts. It is designed to explain how offering figures connect. Give the final documents to your tax adviser, who can determine how the acquired property, debt, and cash affect your exchange and tax reporting.
Check the dates, investment base, time period, and whether fees or reserves are included. One schedule may be annualized while another covers a partial year. Ask the issuer to reconcile the difference in writing. Do not choose the higher number simply because it appears in the shorter summary.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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