Research guide

1031 Exchange DST Brokers: How to Review a Recommendation's Underlying Assumptions

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

This article shows how to examine the assumptions behind a broker's recommendation of a Delaware statutory trust, or DST, investment. One fictional property model follows changes in rent collections, expenses, borrowing costs, and sale price. You will see how those changes affect cash during ownership and money left at sale. The goal is to ask for a clear explanation of the proposed investment and the conditions that could change that explanation.

Table of Contents

Start With the Recommendation's Main Reason

Begin with a sentence, not a return table. Ask the broker to explain why this offering has been proposed for your review. The answer should make clear which feature matters most and what must happen for that feature to help you.

For example, a broker might point to income from leases, a low purchase price, or a plan to improve the property. Those are different reasons. An income case needs a close look at cash collections and costs. A value-growth case needs support for the future sale value. A plan built around debt coming due needs a credible path through that date.

A recommendation can depend on more than one of these factors. The useful next step is to identify the link between them. Perhaps the income target requires full rent collection, while the planned sale requires both higher rent and a favorable buyer price. Those are separate events. Putting them in one attractive return figure can hide how much has to go right.

The Securities and Exchange Commission, or SEC, explains that targets and projections are hypothetical, not actual results. Its performance bulletin also urges readers to examine calculation methods, costs, and market conditions. That supports a basic review question: what sits behind the headline number? SEC, Performance Claims.

For this article, assume a broker has proposed the fictional Willow property offering. The stated reason is a mix of current cash and a sale after five years. We will test that explanation using an original, simplified model. Willow is not a real offering, and none of its figures is a market estimate, fee quote, or forecast.

Write down the starting reason in plain words. Then ask what evidence would weaken it. If the answer is only that the sponsor has experience, return to the property. Experience does not tell you whether this loan, rent forecast, or sale price supports this particular proposal.

The review is most useful when it exposes a decision that needs more work. It does not need to produce a single score. An unresolved loan term may matter far more than several small costs that you have already confirmed.

Separate Evidence, Assumptions, and Calculations

An evidence record reports something found in a dated source. An assumption describes what the model expects. A calculation applies math to the inputs. Keep all three visible because each can fail in a different way.

Suppose a signed lease calls for a monthly payment. That is evidence of a contract term. It is not proof that the tenant will pay each future month. A forecast that collects every dollar is an assumption. Multiplying the monthly amount by twelve is a calculation. Correct multiplication does not settle the payment risk.

Use a short record like this when speaking with a broker:

Item under review Evidence to request Assumption to identify Question to resolve
Rent collections Dated rent and payment records Future amounts actually collected What supports the change from past collections?
Property costs Recent expense records and stated adjustments Costs during the modeled period Which costs have fixed terms and which may change?
Debt payments Relevant loan terms Rate, payment schedule, and balance Does the model match the loan period?
Sale value Stated pricing method and supporting context Income and pricing at exit Which part is observed and which part is projected?
Investor cash Offering terms and calculation details Cash paid and allocation method Is the amount a target, a calculation, or a payment already made?

This is a request framework, not a claim that every document will be shared with you. Some materials may be restricted. Ask what the broker reviewed and what explanation can be provided. If a material fact cannot be confirmed, leave the gap visible instead of quietly filling it with a favorable number.

The Financial Industry Regulatory Authority, or FINRA, discusses reasonable investigation when brokers recommend private placements. Its 2023 notice addresses the issuer's claims, assets, business prospects, and use of proceeds, among other matters. It also explains that concerns may call for further inquiry. An investor's worksheet does not replace those obligations. FINRA, Regulatory Notice 23-08.

Dates deserve their own column. A recent summary can rely on older operating figures. A revised model can keep an earlier loan assumption. Ask for the date of the underlying input as well as the date shown on the presentation.

When two sources differ, keep both values until someone explains the difference. One may cover the whole property, while another covers the investor's share. One may be an annual total, while another covers a partial year. Choosing the larger number without resolving the units can make an unsupported case look convincing.

Build a Complete DST Investment Base Case

The base case is the set of assumptions used as the starting point. It is not a prediction that those assumptions will occur. For Willow, first account for all the money raised and all the initial uses of that money.

Fictional initial funding Amount Fictional initial use Amount
Investor equity $20,000,000 Property purchase price $48,000,000
Borrowed money $30,000,000 Transaction costs $1,000,000
— — Opening capital reserves $1,000,000
Total $50,000,000 Total $50,000,000

Equity means the investors' money in this model. The $50 million raised pays for more than the building price. If we compared only the $48 million price with the $50 million funding, we would leave the costs and reserves unexplained.

Next, set out one full year of property cash. Assume $4.6 million of collected rent and $1.6 million of property operating costs. Subtracting those costs leaves $3 million of net operating income, or NOI. In this model, NOI comes before debt payments, capital reserve funding, and the separate costs listed below.

The $30 million loan has an assumed fixed rate of 5% for the first five years. Payments are interest only during that period. Annual interest is therefore $1.5 million, and the principal balance stays at $30 million until sale. This is a made-up loan, not a claim about available DST borrowing terms.

The model also sets aside $250,000 each year for capital work and pays $150,000 of other asset and administrative costs. We count those amounts separately from the $1.6 million of property operating costs. The annual cash calculation is:

$4,600,000 − $1,600,000 − $1,500,000 − $250,000 − $150,000 = $1,100,000.

Divide $1.1 million by the $20 million of original investor equity. The result is 5.5% for this full-year cash calculation. It is not an annual total return, a guaranteed distribution, or a payment record.

To keep the later sale examples consistent, assume the opening capital reserve and each annual capital contribution are spent on planned work before sale. There is no unused reserve added to sale proceeds and no extra capital call. That is a modeling choice. An actual review must trace the real reserve balances, uses, and limits.

All examples here are simplified economic exercises. They do not model personal taxes, outside advisory fees, trust-law limits, or qualification for a 1031 exchange. Actual offering documents may define costs, cash rights, and payment priorities differently.

A broker should be able to show where a real model departs from this simple layout. An unexplained difference is a question to resolve, not a reason to force the figures into our format.

Test Rent and Expense Assumptions Separately

Change one input first. This makes it easier to see why a result moved. If five inputs change at once, the final number may be correct while its cause remains hard to explain.

Start with rent collections 5% below the base case. This means dollars received, not a five-point change in occupancy. Willow's assumed $4.6 million falls to $4.37 million. Hold all other inputs steady for this first test.

Property costs remain $1.6 million. Debt interest, capital funding, and other costs still total $1.9 million. Cash falls from $1.1 million to $870,000. Against $20 million of equity, that is 4.35% for the year.

The gap is $230,000, exactly the loss in collected rent, because the other dollar inputs did not change. This is the model's result. In a real property, some costs might move with revenue. That would require a different case and an explanation of which costs move, by how much, and why.

Now restore rent collections to $4.6 million. Increase property operating costs by 6%, from $1.6 million to $1.696 million. Keep the other amounts unchanged. NOI becomes $2.904 million and cash becomes $1.004 million. The full-year cash percentage is 5.02%.

Fictional full-year case Collected rent Property operating costs Cash after all modeled deductions Cash divided by original equity
Base $4,600,000 $1,600,000 $1,100,000 5.50%
Rent collections down 5% only $4,370,000 $1,600,000 $870,000 4.35%
Property costs up 6% only $4,600,000 $1,696,000 $1,004,000 5.02%

Neither change is a claim about what will happen. The percentages were chosen to make the mechanism visible. They are not based on a market study, and they do not define a safe range.

Ask the broker why the starting rent and cost figures were chosen. A budget may include an insurance estimate that has since changed. A rent forecast may rely on leases that have not yet started. A higher future rent rate may come with free-rent periods that delay cash collection.

The best follow-up uses the actual assumption: “What happens to first-year cash if this rent starts later?” That is easier to answer and check than “Is the projection conservative?” The word conservative has little value unless the person using it names a comparison and shows the effect.

Combine the Operating Changes

After testing each change alone, put them together. Willow now collects $4.37 million and incurs $1.696 million of property operating costs. NOI falls to $2.674 million.

Subtract the same $1.5 million of loan interest, $250,000 of capital funding, and $150,000 of other costs. Cash is $774,000. Dividing by $20 million of original equity gives 3.87% for the full year.

The original cash calculation was $1.1 million. The combined case is $326,000 lower. That difference comes from $230,000 less collected rent plus $96,000 more property costs. The pieces reconcile to the whole.

This is also a useful way to catch a weak explanation. If a revised presentation still shows $1.1 million of cash, ask which other item changed. Perhaps a cost was removed, capital spending was delayed, or a reserve was used. Each answer means a different case. None should be hidden behind an unchanged headline.

A reserve does not create new property income. Nor does the existence of a reserve tell you that it can be used for any purpose. This example does not assume reserve money can support distributions. It assumes capital reserves are used for planned capital work, as stated in the base case.

The combined test is not a worst-case analysis. It leaves debt terms, capital needs, other costs, and the length of ownership unchanged. Additional adverse events could produce worse results, including a loss of invested money. Favorable events could produce different results too. We have not assigned a probability to any case.

For a real proposal, ask the broker which changes might occur together. A tenant problem might affect collections and increase leasing costs. A major repair might reduce usable space as well as require spending. Testing one input at a time helps explain the mechanics; testing linked inputs helps explain the business risk.

Finish this part of the discussion with a plain statement: under the selected operating changes, the model produces $774,000 rather than $1.1 million of annual cash. Then ask whether the original recommendation still makes sense for the same reason. A reply about the property having a good location does not answer the changed cash question.

Review the Sale Price and Exit Cap Rate

A sale estimate needs its own review. A property can produce the expected annual cash and still sell for less than the model assumed. The expected sale date does not fix the price a future buyer will pay.

Willow's fictional base case uses a sale at the end of year five. For pricing, it assumes NOI of $3.3 million over the next twelve months. That forward income is distinct from the $3 million used in our annual cash example. The extra $300,000 is a future assumption, not money already collected.

Ask what supports that increase. A model that uses a larger sale-year income figure must explain how the property reaches it. If the answer requires higher rent, lower costs, or both, those changes need evidence and timing of their own.

For this example, sale value equals the forward NOI divided by an assumed capitalization rate, usually shortened to cap rate. With $3.3 million of forward NOI and a 6% cap rate, the calculation is $3.3 million divided by 0.06, or $55 million. The 6% is an invented input for this exercise, not a current market rate.

Keep forward NOI unchanged and use a 7% cap rate. The calculated gross value falls to about $47.143 million. A higher cap rate produces a lower price when the income stays the same.

Gross price is not the money left for investors. Assume total sale expenses equal 2% of gross price, and the full $30 million loan principal must be repaid. The simplified example includes all assumed exit costs in that 2% line. It assumes no other exit deduction or unused reserve balance.

Fictional sale calculation 6% exit cap rate 7% exit cap rate
Assumed next twelve months' NOI $3,300,000 $3,300,000
Gross sale price $55,000,000 $47,142,857.14
Sale expenses at 2% $1,100,000 $942,857.14
Loan principal repaid $30,000,000 $30,000,000
Cash left for investor equity $23,900,000 $16,200,000

The table rounds the second column's dollar calculations to cents. Using unrounded inputs gives the same $16.2 million residual. The difference in cash left for equity is $7.7 million.

This does not predict a sale outcome. It shows why a broker's explanation should address the exit price as well as the income target. Debt repayment stays at $30 million in both columns. Less sale value therefore leaves less behind for equity after the debt is paid.

Ask for the reason behind the proposed cap rate, the source period used, and the property traits that make the comparison relevant. A single low rate borrowed from a different property type cannot explain itself. If the broker cannot support the rate, keep the sale value marked as unresolved rather than treating the exact math as proof.

Connect Annual Cash to Total Investment Results

Annual cash and total investment results answer different questions. Cash paid during ownership does not tell you how much of the original investment comes back at sale. A full example must include both.

First, assume the base $1.1 million of annual cash is paid in each of five years. That totals $5.5 million. Add the $23.9 million left for equity at the 6% exit cap rate. Total receipts are $29.4 million against $20 million originally invested.

The nominal gain is $9.4 million. Divide it by the original $20 million to get 47% over the whole period. This is a cumulative, before-personal-tax result. It is not 47% per year, and it does not measure the timing of each payment.

Next, keep those same five years of cash but use the weaker sale case. The $5.5 million of cash plus $16.2 million of sale proceeds equals $21.7 million. The nominal gain is $1.7 million, or 8.5% over the whole period. The annual cash has not changed, yet the total result is quite different.

Finally, combine $774,000 of annual operating cash for five years with the $16.2 million exit. Five years of cash total $3.87 million. Total receipts are $20.07 million. The gain is only $70,000, or 0.35% of the original equity over the full period, before the excluded personal taxes and fees.

Fictional five-year case Cash during ownership Cash at sale Total receipts Cumulative gain on original equity
Base cash and 6% exit cap $5,500,000 $23,900,000 $29,400,000 47.00%
Base cash and 7% exit cap $5,500,000 $16,200,000 $21,700,000 8.50%
Combined operating stress and 7% exit cap $3,870,000 $16,200,000 $20,070,000 0.35%

These cases hold forward sale NOI at $3.3 million to isolate the pricing effect. In the combined stress case, that assumes recovery by the forward sale period from the lower operating NOI. It would need separate support in an actual forecast. A case with both lower forward NOI and a higher cap rate could be worse; this table is not an outer loss limit.

Do not average the three outcomes and call the result expected performance. We supplied no probabilities. Nor should the near-break-even case be described as capital protection. Extra costs, a smaller sale price, a different payment schedule, or worse operations would change the result.

Ask the broker to explain the investment using both the cash period and the exit. If the recommendation depends mainly on the $23.9 million exit amount, say so plainly. A discussion focused only on a 5.5% annual cash figure would leave out much of the original case.

Ask What a Delayed Exit Requires

A delay is not just another year added to a table. The extra time can cross loan dates, lease events, and capital spending needs. Review those events before extending the model.

Willow's assumed loan has a five-year term. Our base case pays off the principal at the end-of-year-five sale. If that sale does not happen, the original model has no funded answer for the debt coming due. We cannot solve that gap merely by leaving the 5% interest line unchanged for year six.

Ask what the actual documents permit and require. Is there an extension right? What conditions apply? Is additional money needed? Who has authority to act? A discussion of possible refinancing is not evidence that refinancing is allowed, available, or suitable for a particular DST structure.

To illustrate the cash effect alone, imagine a separate conditional case in which a lawful and available extension or replacement loan has been established. Assume its interest-only rate is 7% on $30 million. Annual interest becomes $2.1 million. This does not change the fixed rate during the original five-year loan period.

With $3 million of NOI, $250,000 of capital funding, and $150,000 of other costs, annual cash would be $500,000. That equals 2.5% of the original $20 million of equity. The calculation leaves out any new financing costs or changed loan balance. It is not a forecast of a completed refinancing.

The central question comes before that math: what makes the extra ownership period possible? Without an answer, a delayed-sale scenario should show an unresolved financing need. An apparently precise extra year of cash would create false confidence.

Time can also change the investor's needs. A planned sale in five years may fit a household plan that a longer hold would disrupt. The SEC warns that private placements can be difficult to resell and may involve a total loss. A modeled sale year should not be treated as a personal cash-access promise. SEC, Private Placements Under Regulation D.

Ask the broker to state the assumptions that stop being valid after a delay. That list is more useful than simply moving the sale column to the right.

Trace Fees and Reserves Through the Model

Check where each cost enters the calculation. A fee can appear in the money raised, in yearly costs, at sale, or outside the offering model. The location affects which result it changes.

Willow's $1 million of transaction costs is paid from the initial $50 million funding. Our annual $150,000 of other costs is separate from property expenses. The 2% sale-cost line comes out of the gross exit price. The initial transaction cost should not be deducted again at sale just because it appears on a summary of total fees.

That does not mean a real proposal has only these charges. The model is deliberately simple. Ask the broker to show the actual cost schedule and connect each applicable item to its place in the cash forecast. If a charge is included in a broader line, name that line so it is not counted twice.

The SEC's July 2025 fee bulletin explains that fees reduce what investors retain and may not always be obvious. It points readers toward service and product disclosures and questions for the financial professional. The figures in this article are invented; they are not fees reported in that bulletin. SEC, How Fees and Expenses Affect Your Investment Portfolio.

Reserves need a similar trail. Our model starts with $1 million and contributes $250,000 in each of five years. That is $2.25 million available for the assumed capital work over the period. We assumed all of it is used by exit. We did not deduct the same capital work again as a separate annual expense or add the spent reserve to sale proceeds.

An actual model needs a clearer schedule than a single total. When is the money spent? What work does it cover? Is any part restricted? Does the expense forecast already include an item shown in capital spending? The answers prevent both missed costs and double counting.

Do not solve a weak cash result by removing planned capital work without changing the operating and sale assumptions. That work may support the expected rent or future value. If it is delayed, the rest of the model may need to change too.

Bring the Assumptions Back to Your Investment

Large property figures can feel remote. Translate them to the proposed investment amount, while keeping the limits of that translation clear.

Suppose an investor puts $200,000 into Willow's $20 million equity pool. That is 1%. For this exercise only, assume every investor receives the same proportional share of the modeled cash and sale proceeds. Actual payment rights and priorities must be checked in the offering documents.

One percent of the $1.1 million base annual cash is $11,000. One percent of the $774,000 combined operating case is $7,740. That is a $3,260 annual difference for this fictional investor.

At sale, the same assumed 1% share gives $239,000 under the 6% cap case and $162,000 under the 7% cap case. The latter sale payment is $38,000 below the original $200,000. Annual cash received during ownership is separate; it must be included before describing the complete investment result.

For example, five years of $7,740 cash totals $38,700. Add the $162,000 sale payment to get $200,700. The nominal gain is $700 before personal taxes and any outside fees. That is the investor's proportional version of the 0.35% cumulative case, subject to all the same assumptions.

The purpose is to connect the recommendation to a real decision about money. Can a reader explain what the lower cash amount would mean for the household? Would a later exit create a problem even if the final sale value held up? Does the proposed investment depend on money being available at a particular time?

This article cannot answer those personal questions. The calculations also do not establish exchange tax treatment. They give the reader and broker a common set of inputs to discuss with the relevant tax, legal, and financial advisers.

A broker's explanation should use your stated needs without pretending those needs change the property forecast. Needing $11,000 a year does not make the base case more likely. If the lower-cash case would create a serious problem, that fact belongs in the recommendation discussion.

Request an Explanation That Can Be Checked

Ask for a short written explanation with enough detail to reproduce the main result. A large spreadsheet can be useful, but it does not replace a clear account of what drove the recommendation.

For Willow, a useful response would connect four points: the evidence for rent collections, the costs deducted before investor cash, the reason for the sale assumptions, and the path through the debt maturity. Each point should identify what is known and what remains an estimate.

These questions can guide that request:

  1. Which two assumptions matter most to your reason for recommending this offering?
  2. What dated sources support those inputs, and which figures are forecasts?
  3. What changes in the rent-only, expense-only, and combined cases?
  4. Does the exit value use current income or a different forward income figure?
  5. What must happen if the property is not sold before the debt comes due?
  6. Which costs, taxes, or payment terms are outside the displayed result?
  7. What new information would cause you to revisit the recommendation?

The strongest answer is not necessarily the longest. A clear explanation may identify a missing loan term and pause that part of the analysis. An unsupported answer may fill several pages while never naming the source for the assumed sale price.

Watch for a change of subject. A question about rent collection should not end with a sponsor's years in business. A question about debt maturity should not be answered only with an expected distribution. Background may matter, but it must connect to the specific assumption under review.

Also ask for the unfavorable explanation in ordinary words. “The property could still pay cash while returning less equity at sale” accurately describes part of our model. It is easier to understand than a list of return terms without the amounts behind them.

An honest gap is a useful result. If the broker has not obtained the needed answer, the record can say who is seeking it and which conclusion remains open. A filled field should never stand in for a supported conclusion.

Keep a Record of Changes Before You Decide

Keep the original case and any revised cases together. Label each with the offering identity, document date, source date, and the inputs that changed. A later file should not erase the reason an earlier question was raised.

For Willow, the starting annual cash case is $1.1 million. The operating stress case is $774,000. If someone later presents $900,000, ask for the changed inputs. The new figure might reflect an entirely reasonable revision, but it is not explained merely because it lies between the earlier results.

Track conclusions as well as numbers. The broker might first favor the offering for current cash, then rely more on the planned sale after operating assumptions weaken. That is a change in the reason for the recommendation. The reader should be able to see and discuss it.

Use a simple unresolved-question record. Name the question, the relevant source, the person expected to answer, and the conclusion affected. Close it only when the response addresses the original point. A new brochure does not close a question about a specific loan condition unless it answers that condition.

Before a decision, repeat the explanation in your own words. State what supports the current-cash case, what supports the exit case, and which event would require another review. If those points are still unclear, identify the missing explanation rather than trying to memorize the projected percentage.

There is no universal passing score for this exercise. A thoroughly explained model can still describe an investment that does not fit a particular investor. The goal is a decision based on visible assumptions, with the important gaps and consequences understood.

Frequently Asked Questions

What should I ask a DST broker about a projected distribution?

Ask what operating cash supports it, what costs have been deducted, and whether it is a target or a payment already made. Request the source period and the changes assumed for future periods. Then ask what happens when the key income or cost inputs change. A projected percentage alone does not explain those points.

Does a stress test predict what a DST will return?

No. A stress test shows what selected inputs produce under a stated method. The examples here have no assigned probabilities and do not cover every possible event. Passing through one adverse case does not establish a floor on losses. The reader still needs evidence for the inputs and a review of the actual offering terms.

Why can a small rent change cause a larger cash problem?

Many modeled deductions remain fixed while revenue changes. Willow loses $230,000 of collected rent in the rent-only case, and annual cash falls by the same dollars because we hold all costs steady. That loss is a larger share of the smaller cash remainder than of total revenue. Actual costs may behave differently.

What is an exit cap rate in this example?

It is the assumed rate used to convert forward property NOI into a sale price. We divide $3.3 million by 6% or 7%. The higher rate gives the lower value when income stays unchanged. Both rates are fictional. The relevant rate for a real proposal needs property-specific support and still cannot guarantee a sale price.

Is the model's 5.5% annual cash figure its total return?

No. It is one year's calculated cash divided by original equity. Total results also depend on later cash, costs, and money returned at exit. Our base annual cash produces very different cumulative results at the two sale prices. None of the cumulative percentages shown is an annualized return.

Can the broker just extend the holding period in the forecast?

The spreadsheet can be extended, but the assumptions need to support the extra period. Check debt maturity, any extension conditions, cash needs, and authority under the actual documents. This article's 7% borrowing example is conditional. It does not establish that a particular DST can obtain or use a new loan.

Should fees be subtracted again when checking the return?

Only if the displayed result excludes those applicable fees. Identify where each charge already appears. Subtracting an included fee twice understates the modeled result; omitting a separate charge overstates it. The same care applies to capital spending and reserves. Ask for a reconciliation rather than relying on a single total-fee label.

What if the broker cannot explain a key assumption?

Record the gap and the conclusion that depends on it. Ask what source or specialist could resolve it and whether the recommendation is being reconsidered while the answer is pending. An unexplained input should not become a confirmed fact through repetition. The next step depends on the importance of that input to your decision.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. This educational library explains research methods, evidence limits, and questions investors can discuss with their advisers. Its examples do not replace a review of a specific offering or an investor's circumstances.

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