DST Due Diligence Checklist: What to Read in the PPM

Working checklist

Use this checklist when evaluating any DST offering. Each item should be confirmed through the Private Placement Memorandum (PPM), not through marketing materials or verbal summaries. The PPM is the governing document. If there is a discrepancy between the PPM and any other source, the PPM controls.

Print this page or save it for reference during your evaluation.

---

Property

• Property type identified (multifamily, industrial, office, retail, medical, other)
• Location and submarket understood; market growth or decline assessed
• Current occupancy rate confirmed (target: 93%+)
• Physical condition reviewed; age of major systems (HVAC, roof, plumbing) noted
• Comparable properties reviewed for rent levels and sale prices
• Worst-case scenario addressed in PPM (rent decline, occupancy drop)

Tenants and leases

• Major tenants identified by name and creditworthiness
• Lease expiration dates mapped; weighted average lease term calculated
• Renewal likelihood assessed for each major tenant
• Rent escalation provisions confirmed (fixed increases, CPI, flat)
• Revenue concentration risk quantified (% from top 1-2 tenants)
• PPM addresses what happens if a major tenant does not renew

Financing

• Loan amount and loan-to-value ratio confirmed
• Interest rate type confirmed (fixed or variable; if variable, cap structure reviewed)
• Loan maturity date compared to projected hold period
• Prepayment penalties or yield maintenance provisions identified
• Lender identity and type noted (bank, CMBS, life company)
• Plan for loan maturity addressed if it occurs before projected exit

Sponsor

• Years in business and number of completed DST offerings confirmed
• Full-cycle performance data reviewed (projected vs. actual returns)
• Total assets under management confirmed
• Sponsor experience with this specific property type and market verified
• Prior offering problems, disputes, or litigation disclosed and reviewed
• Sponsor co-investment alongside investors confirmed or absence noted
• Reference from prior offering investor obtained (if possible)

Fees

• Sponsor acquisition fee quantified (typical: 1-3%)
• Selling commissions and offering costs quantified (typical: 5-10%)
• Total upfront fee load calculated as % of investor equity (typical range: 10-18%)
• Annual asset management fee confirmed (typical: 0.5-1.0%)
• Annual property management fee confirmed (typical: 4-8% of gross rent)
• Disposition fee confirmed (typical: 1-3%)
• "Use of proceeds" chart reviewed: how capital is allocated between acquisition, fees, and reserves
• Fees in PPM compared to verbal or marketing representations; any discrepancies flagged

Operating restrictions (the seven deadly sins)

• No new capital contributions after closing confirmed
• No refinancing or new borrowing confirmed
• No reinvestment of sale proceeds confirmed
• Leasing and re-leasing limited to pre-authorized terms confirmed
• Tenant improvements limited to pre-authorized amounts confirmed
• No commingling of DST funds with other sponsor funds confirmed
• Cash between distributions held in short-term instruments only confirmed
• Reserve adequacy assessed given these constraints

Tax treatment

• DST structure confirmed as qualifying under Revenue Ruling 2004-86
• Annual K-1 reporting confirmed
• Tax basis of beneficial interest understood
• Distribution tax treatment clarified (return of capital vs. ordinary income)
• 1031 exchange compatibility at exit confirmed
• Special tax risks or considerations noted

Risk factors

• PPM risk factors section read in full (not skipped)
• Property-specific risks identified (not just generic boilerplate)
• Tenant credit risk assessed
• Interest rate risk assessed
• Market-specific risks assessed
• Risks that seem underweighted relative to actual situation flagged

Distributions

• Distribution frequency confirmed (monthly, quarterly)
• Distribution calculation method understood (from NOI after expenses, debt service, reserves)
• Conditions under which distributions can be reduced or suspended identified
• Preferred return structure confirmed (if applicable)
• Profit allocation between investors and sponsor understood
• Waterfall structure reviewed for fairness

Exit strategy

• Expected hold period confirmed with flexibility parameters
• Triggers for disposition decision identified (timeline, market opportunity, loan maturity)
• Sale method described (broker, auction, direct negotiation)
• Disposition timeline and process outlined
• Proceeds distribution method described
• Extension provisions reviewed (can sponsor extend hold indefinitely?)
• 721 pathway availability confirmed or ruled out

---

The 10-question test

Before committing capital, you should be able to answer every one of these questions based on the PPM:

1. Do I understand the property, its location, and its competitive position in the submarket?
2. Do I understand the tenant base, lease terms, and concentration risk?
3. Do I understand the financing structure, including interest rate, maturity, and refinancing constraints?
4. Do I understand the sponsor's track record with completed offerings in this property type?
5. Do I understand all fees and the total fee load, and have I calculated the fee-adjusted return?
6. Do I understand the operating restrictions and what they prevent the sponsor from doing?
7. Do I understand the tax treatment and how this investment fits my 1031 strategy?
8. Have I read the risk factors section and identified the material risks specific to this offering?
9. Do I understand how distributions are calculated, when they can be reduced, and how profits are split?
10. Do I understand when and how I will get my capital back, including what the sponsor controls and what I do not?

If you cannot answer all 10 clearly, keep reading the PPM or ask your advisor for clarification before committing.

When to get legal review

If you are committing $250,000 or more, consider having a real estate attorney or tax attorney review the PPM. Cost is typically $1,000 to $3,000. A lawyer can identify unusual provisions, explain legal language in plain terms, flag risks that might surface if circumstances change, and verify the 1031 eligibility claims.

The sponsor should welcome due diligence questions. If they discourage scrutiny or pressure you to commit before completing your review, that is itself a finding worth noting.