DST Due Diligence Checklist: What to Read in the PPM

Why You Need to Read the PPM

The Private Placement Memorandum is the legal document that governs your DST investment. It describes the property, the terms, the risks, the fees, the tax treatment, and your rights. Everything about the investment is in here.

Many investors rely on summaries, fact sheets, or an advisor's explanation. That's a mistake. The PPM is the actual agreement. If there's a discrepancy between the summary and the PPM, the PPM controls.

You're investing your capital. You're doing this to defer taxes and diversify. You're committing to illiquidity for years. You deserve to understand what you're committing to.

Reading the PPM is not paranoia. It's professional.

The 10 Key Sections to Focus On

A typical DST PPM is 150 to 300 pages. You don't need to memorize all of it, but you need to understand these sections:

Section 1: Property Description and Market Analysis

Find the section that describes the property. You should understand:

• What type of property is it? (Office, retail, multifamily, industrial, mixed-use?)
• Where is it located? Is the market growing or declining?
• What is its physical condition? When were major systems last updated?
• What square footage does it have, and what is the current occupancy rate?
• What are the comparable properties selling for in the market?
• What rent does this property command compared to comps?

Read the market analysis. Are the assumptions reasonable? If the PPM projects 3 percent annual rent growth, is that supported by market data? If it assumes stable occupancy, is that realistic given the tenant base?

Look for worst-case scenarios. The PPM should discuss potential market downturns. How does the property perform if rents decline 10 percent? If occupancy drops?

Red flags: Market analysis that seems overly optimistic, cherry-picked data, or failure to address potential risks.

Section 2: Tenant Information and Lease Terms

This is critical. The property's performance depends entirely on tenants paying rent.

For each major tenant, find:

• The tenant's name and creditworthiness. (Is it a national chain or local operator? Has it been stable?)
• The lease term and expiration date. (When does the lease expire? Is renewal likely?)
• The rent level and any escalation provisions. (Is rent fixed or does it increase annually?)
• Any renewal or expansion options the tenant has.
• What percentage of property revenue comes from this tenant?

If one tenant represents 40 percent of revenue and its lease expires in 2 years, that's a concentration risk. The PPM should address what happens if that tenant doesn't renew.

Look at the lease abstract or lease summary in the PPM. It should provide detail on lease terms, not just tenant names.

Red flags: Heavy concentration in one or two tenants, leases expiring soon without renewal certainty, tenants in distressed industries, or lack of detail on lease terms.

Section 3: Financing and Debt Structure

The PPM should clearly explain the property's financing.

Specifically, understand:

• The loan amount and the loan-to-value ratio. (Is it 50 percent, 65 percent, 75% LTV?)
• The interest rate. Is it fixed or variable? If variable, how often does it adjust and what's the cap?
• The amortization period and term. (Is it a 30-year amortization with a 10-year balloon, or a 20-year term?)
• The maturity date. Does the loan mature before the expected hold period ends?
• Any prepayment penalties or yield maintenance provisions.
• The lender's identity and the lender's stability. (Is it a bank, CMBS lender, life insurance company?)

If the loan matures before the property is sold (say, year 9 out of a 10-year hold), the PPM should explain what happens at maturity. Can the property be refinanced? Will the sponsor try to extend the loan?

Remember, the DST sponsor cannot refinance or renegotiate the loan during the hold period (Sin #2). So if a loan matures, the sponsor is constrained in their options.

Red flags: Variable-rate loans with no caps in a rising rate environment, loans maturing shortly before the expected exit, unfavorable prepayment terms, or unclear details on the lender.

Section 4: Sponsor Track Record and Experience

The sponsor's track record matters immensely. Find the section on sponsor background and experience.

Look for:

• How long has the sponsor been in business?
• How many DST offerings has the sponsor completed?
• How have previous offerings performed? (Does the sponsor provide performance comparisons vs. projections?)
• What is the sponsor's total assets under management?
• Have there been any significant problems or disputes with prior offerings?
• What is the sponsor's experience with this specific property type and market?

If a sponsor is raising capital for their first DST offering, or if they've had troubled properties in the past, that's important context.

Better: ask if you can speak to investors from a prior offering. Word of mouth matters. If previous investors were satisfied and received distributions as projected, that's a good sign. If they felt misled or disappointed, that's a serious warning.

Red flags: Limited track record, prior offerings that underperformed significantly vs. projections, or sponsor changes/management transitions.

Section 5: Fee Structure and Use of Proceeds

Review the detailed fee schedule. The PPM should break down:

• The sponsor acquisition fee.
• Offering costs and how they're allocated.
• Annual asset management fees and property management fees.
• Administrative fees.
• Disposition costs.

Also review the "Use of Proceeds" chart. It should show how your capital is allocated: how much to acquisition, how much to closing costs, how much to reserves, etc.

If 20 percent of your capital is going to fees before a dollar hits the property, you should understand that explicitly.

Compare the fees disclosed in the PPM to what you were told verbally or in marketing materials. They should match. If they don't, ask why.

Red flags: Vague or buried fee disclosures, major discrepancies between fee summaries and the detailed fee section, or fees that seem excessive relative to the property type.

Section 6: Operating Restrictions and Management

This is where the seven deadly sins appear, though they may not be labeled that way.

The PPM should clearly state:

• Whether new capital contributions are allowed. (Answer: no.)
• Whether the loan can be refinanced or renegotiated. (Answer: no.)
• Whether property proceeds from casualty or sale can be reinvested. (Answer: no.)
• How the sponsor can lease or re-lease space. (Usually, within pre-approved terms.)
• How much the sponsor can spend on tenant improvements. (Usually, capped.)
• Any restrictions on how cash is held between distributions.

Read this section carefully. These restrictions directly affect flexibility. If you're concerned the sponsor might need to make capital improvements or renegotiate a lease, this section will tell you whether that's possible.

Red flags: Vague operating provisions, restrictions that are more burdensome than expected, or unclear limits on sponsor discretion.

Section 7: Tax Treatment and Reporting

The PPM should explain how the DST works for tax purposes and what your reporting obligations are.

Specifically:

• How will you be taxed on distributions?
• Will you receive a Schedule K-1 each year? (You should.)
• What is the anticipated tax basis of your beneficial interest?
• Are there any special tax considerations or risks?
• How does the 1031 exchange relate to this DST investment?

Make sure the PPM addresses 1031 exchange specifics. It should confirm that the DST structure qualifies for 1031 exchange treatment and reference Revenue Ruling 2004-86.

Red flags: Unclear or evasive discussion of tax treatment, no mention of 1031 eligibility, or tax projections that seem unrealistic.

Section 8: Risk Factors

Every PPM has a risk factors section. It's often long and full of disclosures that sound boilerplate. But it's important.

Read it. The risks disclosed here are real. The sponsor is legally obligated to disclose material risks. So if the PPM warns of tenant credit risk, economic downturn risk, interest rate risk, or property-specific risks, take it seriously.

The fact that a risk is disclosed doesn't mean it will happen, but it means the sponsor has identified it as possible.

Red flags: Vague or generic risk factors (every investment has some risk, but there should be specific risks tied to this property), or critical risks that seem underweighted relative to the actual situation.

Section 9: Distribution Waterfall and Profit Allocation

The PPM should clearly explain how cash flow and profits are allocated. Is the distribution treated as a return of capital first, then taxable income? How are profits divided between investors and the sponsor?

Some offerings have preferred returns (you get a minimum percentage return before the sponsor participates in upside). Some are straight pro rata (you share proportionally in all proceeds).

Understand which you're getting and whether the structure is fair.

Red flags: Complex waterfall structures that disadvantage you, or sponsor profit participations that seem excessive.

Section 10: Exit Strategy and Disposition Process

Finally, understand how the investment ends. The PPM should address:

• The expected hold period and any flexibility around that timeline.
• What triggers a disposition (expected timeline, market opportunity, casualty)?
• How will the property be sold? (Broker, auction, direct negotiation?)
• What happens if the property sells early or late?
• How will proceeds be distributed?
• What happens if the property doesn't sell (e.g., extension of hold)?

Some DSTs have flexibility on hold period. Others are more fixed. If the PPM says "7-year hold, with possible extension," that's different from "7-year hold period, mandatory."

Red flags: Unclear or flexible exit provisions, no timeline for disposition, or language suggesting the sponsor can extend the hold indefinitely.

Your 10-Question Framework

Before you commit capital, you should be able to answer these 10 questions based on the PPM:

1. Do I understand the property, its location, and its market position?
2. Do I understand the tenant base and the concentration risks?
3. Do I understand the financing, including interest rate, maturity, and any refinancing constraints?
4. Do I understand the sponsor's track record and experience?
5. Do I understand all fees and the total fee load?
6. Do I understand the operating restrictions and what they mean for management flexibility?
7. Do I understand the tax treatment and how this fits into my 1031 strategy?
8. Have I read and understood the material risk factors?
9. Do I understand how distributions will work and how profits are allocated?
10. Do I understand when and how I'll get my capital back?

If you can't answer all 10 clearly, keep reading or ask your advisor.

Getting Legal Review

If you're committing significant capital (usually $250,000 or more), consider having a real estate attorney or tax attorney review the PPM.

A lawyer can:

• Identify unusual or unfavorable provisions.
• Explain legal language in plain English.
• Flag provisions that might cause issues if circumstances change.
• Review the 1031 eligibility claims and tax treatment.

Cost is typically $1,000 to $3,000 for a PPM review. It's money well spent if it catches an issue or clarifies your understanding.

The Bottom Line

The PPM is your contract. It governs your investment for the next five to ten years. You're not reading it to be paranoid. You're reading it to be informed.

Take your time. Ask questions. Get clarity before you commit. The sponsor should welcome due diligence questions. If they don't, that's a warning sign.