As interest rates have risen and debt now carries a negative spread, more DST sponsors are offering "all cash" deals with no debt at the property level. These can yield more than leveraged DSTs, and they remove refinancing risk. But not all all-cash offerings are created equal. Some carry leverage. It just sits where most investors never look.

Where the leverage hides

A top-tier sponsor typically buys a property with its own cash or a balance-sheet loan, then syndicates it to DST investors.

Smaller sponsors often lack the capital to do that. Instead, they buy the property with a short-term bridge loan, often two years, personally guaranteed by the sponsor's principals. The DST itself is debt-free, but the sponsor is not. That bridge loan gets paid off or rolled over with proceeds from the next offering, and the next. The cycle works until one of three things happens:

1. New offerings take longer to sell.
2. Existing offerings can't exit without a loss.
3. The lender stops extending credit.

When that happens, the sponsor is under pressure, and the sponsor controls your investment. You cannot fire them.

How do I know? Read the PPM.

It's disclosed. Look at the Conflicts of Interest section and any discussion of acquisition financing or guarantees. The PPM will tell you that the principals' personal interests, including their guarantees, may conflict with yours, and that the sponsor is not obligated to resolve those conflicts in your favor. When the principals' personal balance sheets are on the line, you can guess whose interests come first.

Three trends worth watching

1. The REIT exit

   More sponsors are launching REITs or offering 721 UPREIT conversions. Sometimes this is legitimate: the sponsor is using DSTs to build a portfolio it can eventually take to market. But sometimes the sponsor holds properties that can't be sold without a loss, and rolling them into a REIT obscures that loss. Even in DSTs sold without a 721 option, the documents often permit a sale to the sponsor's own REIT. Your "choice" then becomes taking operating partnership units or cashing out at a price the sponsor set, on both sides of the trade.

   Understand what you give up with OP units. Once you're in, you can never do another 1031 exchange. Your remaining options are holding until death for a step-up in basis or eventually triggering the tax you spent years deferring.

2. Offerings for properties the sponsor doesn't own

   More DSTs are offered on a best-efforts basis for properties the sponsor hasn't closed on. If the raise falls short, the deal falls apart. If you identified that DST as your replacement property, you may be facing a failed exchange. Always identify backup properties within your 45-day window. The three-property rule exists for exactly this.

3. Distributions that aren't income

   When a sponsor is stressed, early distributions are sometimes paid from reserves or offering proceeds rather than property cash flow. Ask where the yield is actually coming from.

What to look for

• Strongly favor established sponsors. A track record and billions under management don't guarantee success, but an undercapitalized sponsor adds a layer of risk you are not paid for. Even with a top sponsor, check:
  • the markup between the sponsor's purchase price and the price you're paying
  • total fees and load
  • reserve levels
  • master lease terms
  • whether the sponsor has a history of rolling DSTs into its own REIT
• Apply common sense to yield. If top sponsors are paying 4.5% and another DST is offering 7–8%, ask why. The extra yield is compensation for risk, and that risk may be one you wouldn't knowingly accept. High-pressure sales tactics are another red flag.
• Know who is paying your advisor. Most DST representatives are compensated by the sponsor through commissions, and their due diligence often repeats the sponsor's marketing materials. A PPM runs hundreds of pages with dozens of risk factors. The skill is knowing which three actually matter. Work with someone who reads them, and who works for you.

This article is for educational purposes and is not a recommendation to buy or sell any security.