How to Evaluate a DST Sponsor: 10 Questions Every Advisor Should Ask
For financial advisors helping clients navigate 1031 exchanges, choosing the right Delaware Statutory Trust sponsor can make or break an investment outcome. Here's what separates institutional-quality operators from the rest of the field.
The DST marketplace has grown considerably over the past decade, and with that growth has come a wider range of sponsors vying for advisor and investor attention. Some bring decades of institutional real estate experience. Others are newer entrants still finding their footing. For advisors conducting due diligence on behalf of clients—particularly those executing time-sensitive 1031 exchanges—knowing how to separate substance from marketing is essential.
Not every DST sponsor operates the same way, and the differences in track record, asset selection, fee structure, and operational transparency can significantly impact investor outcomes. The following ten questions provide a framework for evaluating any DST sponsor before recommending their offerings to clients.
1. What is the sponsor's real estate track record outside of DST syndication?
A sponsor's DST offerings are only as strong as their underlying real estate expertise. Before examining any specific property, advisors should understand where the sponsor's principals developed their experience. Did they build their careers at institutional shops—pension fund advisors, publicly traded REITs, or major development firms? Or did they move directly into syndication without that foundational background?
Sponsors with institutional pedigrees tend to approach acquisitions, underwriting, and asset management with greater discipline. They've typically navigated multiple market cycles and understand how to stress-test assumptions rather than relying on best-case projections.
Ask for specifics: total transaction volume, asset classes managed, and how long the team has worked together. Continuity matters in real estate operations.
2. How does the sponsor source and underwrite acquisitions?
The quality of a DST investment begins long before the offering documents are prepared. Understanding a sponsor's acquisition process reveals whether they're disciplined buyers or simply aggregating whatever properties they can find to meet syndication volume targets.
Strong sponsors maintain clear investment criteria and stick to them even when deal flow is competitive. They can articulate why they pursue certain markets, property types, and tenant profiles—and why they pass on others. Their underwriting should incorporate conservative assumptions about rent growth, cap rate movement, and capital expenditure requirements.
Red flags include sponsors who seem to acquire whatever is available, lack a coherent investment thesis, or consistently project aggressive appreciation without acknowledging downside scenarios.
3. Who are the tenants, and how creditworthy are they?
Tenant quality directly affects the stability of distributions and the overall risk profile of a DST investment. Investment-grade tenants—those with strong balance sheets and credit ratings—provide a level of predictability that smaller or financially weaker tenants cannot match.
Advisors should look beyond the tenant's name recognition. A well-known brand operating under a franchise model may not carry the same credit strength as a corporate-guaranteed lease with a Fortune 500 company. Understanding the specific lease structure, guarantor, and tenant financials is essential.
For multi-tenant properties, examine the rent roll concentration. Heavy reliance on a single tenant or industry can introduce vulnerability that isn't immediately obvious from marketing materials.
4. What is the lease term, and what happens at expiration?
Lease duration is one of the most misunderstood aspects of DST investing. A property with fifteen years remaining on the lease presents a very different risk profile than one with three years left—even if both feature the same tenant.
Beyond the initial term, advisors should understand the renewal structure. Are there options at predetermined rates, or will the sponsor need to negotiate entirely new terms? What's the historical renewal behavior for this tenant type in this market?
The interplay between lease expiration and the DST's projected hold period deserves careful attention. If the trust is expected to sell in seven years but the lease expires in five, the sponsor's plan for that gap period should be clearly articulated.
5. How transparent is the fee structure?
DST investments involve multiple layers of fees, and not all sponsors disclose them with equal clarity. Acquisition fees, asset management fees, disposition fees, financing coordination fees—the list can be extensive. What matters isn't just the total cost but whether the sponsor presents these fees straightforwardly or buries them in offering document footnotes.
Institutional-quality sponsors understand that fee transparency builds advisor confidence. They can walk through their compensation structure without defensiveness and explain how their incentives align with investor outcomes.
Compare fee structures across multiple sponsors before forming expectations. Significant deviations from market norms—in either direction—warrant further inquiry.
6. What is the sponsor's approach to leverage?
Debt amplifies both returns and risk in real estate investing. The amount of leverage a sponsor employs, the terms of that financing, and the structure of any loan provisions all affect the investment's risk profile.
Most DST offerings use moderate leverage in the 40-60% loan-to-value range, but the details matter considerably. Is the debt fixed-rate or floating? What are the prepayment provisions? Are there financial covenants that could force a sale under unfavorable conditions?
Advisors should also understand how the sponsor manages refinancing risk. If the debt matures before the anticipated hold period ends, what's the plan? Conservative sponsors address these scenarios explicitly rather than hoping market conditions cooperate.
7. How does the sponsor communicate with investors throughout the hold period?
The relationship between sponsor and investor doesn't end at closing—it's just beginning. Regular, substantive communication about property performance, market conditions, and any material developments demonstrates operational professionalism.
Ask about reporting frequency, format, and content. Quarterly reports with detailed financial statements, occupancy updates, and market commentary indicate a sponsor that takes investor relations seriously. Sparse or sporadic communication often signals broader operational issues.
Also inquire about how the sponsor handles unexpected developments. Properties sometimes face challenges—tenant issues, capital needs, market shifts. Sponsors that communicate proactively about problems, rather than minimizing them until they become unavoidable, build lasting advisor relationships.
8. What is the sponsor's track record of full-cycle DST transactions?
Perhaps the most telling indicator of sponsor quality is their history of completed investments. How many DSTs has the sponsor taken through the full cycle from acquisition to disposition? What returns did investors actually receive compared to initial projections?
Newer sponsors may not have extensive full-cycle history, which isn't automatically disqualifying—but it does shift more weight to the experience of their principals and the quality of their current offerings. Sponsors with longer track records should be able to provide detailed performance data across multiple market environments.
Be cautious of sponsors who emphasize theoretical returns or cherry-pick favorable examples while avoiding discussion of investments that underperformed.
9. Does the sponsor maintain a meaningful co-investment in their offerings?
Alignment of interest is a fundamental principle in investment management. When sponsors invest their own capital alongside investors, they share in both the upside potential and the downside risk of each property.
Ask whether the sponsor maintains any ongoing ownership stake in their DST offerings and, if so, at what level. Sponsors who are willing to invest alongside their clients demonstrate confidence in their own underwriting and create a structural alignment that pure fee-based arrangements lack.
This doesn't mean sponsors without co-investment are necessarily problematic, but it's a meaningful differentiator worth considering.
10. How does the sponsor handle the 1031 exchange process and timeline coordination?
For investors using DST investments to complete 1031 exchanges, execution logistics matter enormously. The 45-day identification period and 180-day closing deadline create genuine time pressure, and sponsors vary widely in their ability to accommodate these constraints.
Experienced sponsors understand the exchange process intimately and have established relationships with qualified intermediaries, securities counsel, and broker-dealers that enable efficient execution. They can clearly communicate typical closing timelines and flag any potential obstacles early in the process.
Advisors should also understand what happens if an offering doesn't close within the investor's exchange window. Reputable sponsors have contingency plans and won't pressure investors into inappropriate decisions simply to complete a transaction.
The Bigger Picture
These ten questions provide a starting framework, but evaluating DST sponsors ultimately requires judgment developed through experience. The best sponsors welcome rigorous due diligence because it distinguishes them from competitors who can't withstand scrutiny.
For advisors building long-term practices around 1031 exchange solutions, developing relationships with a select group of institutional-quality sponsors pays dividends over time. Knowing how a sponsor operates, communicates, and performs through various market conditions creates confidence that translates directly to better client outcomes.
The DST marketplace will likely continue expanding as more investors seek tax-advantaged passive real estate ownership. Advisors who develop expertise in sponsor evaluation will be well-positioned to guide clients through this landscape effectively.
Medalist Diversified REIT is a DST sponsor offering institutional-quality real estate investments to accredited investors and their advisors. To learn more about our current offerings or discuss partnership opportunities, contact our team.
