Research guide

Best DST Investments (2026): Comparing Fixed-Rate and Floating-Rate Financing

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

This article compares fixed and floating debt in a small set of 2026 Delaware statutory trust records. It checks the stated rate, related hedge, and loan end date, then shows how those features affect a cash budget. Separate examples explain floors, caps, swaps, and gaps in protection. The aim is to help readers judge financing terms without treating one loan type as best for every investor.

Table of Contents

Best DST Investments: Start With the Whole Debt Structure

The lowest stated interest rate does not settle a DST financing comparison. A loan can start with a low rate, change each month, and have a separate contract that limits part of the change. Another loan can hold its rate steady while charging a large sum to end it early. Both may leave all principal due at maturity.

Separate three questions. What does the borrower owe under the loan? What does another party owe under a hedge? What cash remains after the two are combined? A hedge is a contract meant to offset a specified exposure. It does not erase every cost or make property income certain.

A sales chart may place a hedged floating loan in a fixed-rate column. That can describe its intended net interest cost. It still leaves two contracts to review. Ask how the chart reached that label, then retain the underlying terms beside it.

The same care applies to a floating label. It may suggest that every rise in a benchmark reaches the borrower. A cap or swap can change that result. Omitting the hedge overstates one risk; omitting its price or limits understates another.

For this review, “best” means a financing structure whose costs and limits fit the property plan and the investor's needs. We do not award a score or rank the entire market. Our focus is the path from contract terms to cash, including the date when protection stops.

This work also needs current records. FINRA's guidance for member firms calls for attention to each offering's facts and an updated investigation file. A loan that looked simple at launch may have new terms when another investor considers it. A reader's worksheet helps frame questions but does not replace a firm's duties. FINRA Regulatory Notice 23-08, May 9, 2023.

The 2026 DST Financing Sample

We inspected the following public records on October 16, 2026. They offer different levels of detail. A private placement memorandum, or PPM, describes one offering; a public company's quarterly filing reports another structure. Neither record establishes today's purchase availability or every term that would govern a new buyer.

Record Loan terms described Rate protection and research boundary
NewStar 17 Sweetwater Springs, DST; February 9, 2026 PPM $17.6 million; 5.10% fixed; monthly interest only; actual days over 360; maturity March 1, 2036 Fixed loan rate; summary has conditional early-payoff rules. Full executed loan records and current payoff quote not reviewed.
MDRR XXV DST 1; Medalist report for June 30, 2026 $7.71 million; one-month SOFR plus 2.5%; interest only; maturity November 7, 2030 Separate swap has $7.71 million notional, 5% fixed payments, matching floating receipts, and the same end date; disclosed premium $417,136. Full signed swap not reviewed.

Sources: NewStar PPM, printed pages 40–41; Medalist quarterly filing, Tesla DST mortgage and rate-protection sections.

Two checks follow from those disclosures. The swap's stated amount and end date match the reported loan, so calling that loan unhedged would omit material terms. The filing also says the DST left Medalist's consolidated accounts during June; a dash in those accounts does not prove the DST's debt was repaid. The filing does not establish later hedge status. Medalist quarterly filing.

The fixed-loan check is different. On an unchanged $17.6 million balance, 5.10% over 365 accrued days using a 360-day divisor gives about $910,067. Simply multiplying balance by rate gives $897,600. The roughly $12,467 gap reflects day count, not a rate increase. This is an arithmetic check of the disclosed convention, not a reconstruction of actual bank payments. NewStar PPM, printed page 40.

Those findings do not make the two offerings otherwise comparable. Property risk, fees, investor terms, and current amendments need their own review. We did not obtain equal private document packages. All remaining dollar examples are invented and separate from these named investments.

Fixed-Rate DST Loans: Test the Payment Calendar

A fixed rate answers one question: what stated rate applies during the covered term under the stated conditions? It does not, by itself, answer how much cash leaves the account each month. Day count, changes in principal, and the start of principal payments can affect the bill.

Begin with the schedule. Find the first payment date, the period it covers, and the date of the last regular payment. Check whether the loan starts with interest only and later requires principal. Write the balloon balance due at maturity on its own row. A loan can use a long repayment schedule yet come due well before that schedule ends.

Interest Only Does Not Mean the Debt Goes Away

Consider a fictional $10 million loan at a fixed 5.5% rate. For the simple annual models below, assume each full year costs exactly balance times rate. Annual interest is $550,000. If no principal is paid, the borrower still owes $10 million after three such years.

Now add an assumed $100,000 principal payment at the end of year one. That year needs $650,000 for interest and principal together. The $100,000 reduces debt; it is not another interest charge. Under the same simple convention, next year's interest on $9.9 million would be $544,500 if the rate and balance stay unchanged all year.

These are separate loan cases. Do not carry the principal reduction into later interest-only examples. Keeping each case labeled prevents a lower payoff balance from appearing in a model that never funded the payment that created it.

Fixed Rates and Other Contract Conditions

The words fixed rate should also prompt a search for default interest and other conditional charges. A normal scheduled rate is not proof that every possible charge stays at that level. Record what event changes the cost and where the clause appears.

Then check the budget's units. A monthly figure times twelve may miss a partial year. A full-year interest expense may include accrued amounts paid next year. Use the cash schedule when testing money available for investor payments, and retain the expense schedule if it answers a different accounting question.

Floating-Rate DST Loans: Benchmark, Spread, and Floor

A floating loan needs more than a single percentage in the comparison file. It needs the benchmark, the added spread, the reset rule, and any floor. The spread is the amount added to the benchmark. A floor sets a minimum for the part of the calculation named in the contract.

SOFR is one benchmark readers may encounter. The New York Fed describes its overnight SOFR as a measure of secured overnight borrowing backed by Treasury securities. That does not make a daily website value the right input for every loan labeled SOFR. Use the precise rate version, observation date, and calculation rule named in the loan. New York Fed, SOFR data and description.

A one-month term rate and a rate based on daily observations need not have the same value on the same date. Even when two documents use similar names, check their definitions before treating the rates as equal. A forecast chart is a different input again; it is not the amount already fixed for a payment period.

Read Where the Floor Applies

Our fictional Harbor debt has a $10 million balance. Its rate equals the greater of the benchmark or 3%, plus a 2% spread. The floor applies to the benchmark before the spread is added. We assume a full year at each selected rate, no principal payments, and no other loan costs.

Assumed benchmark Benchmark after the 3% floor Add 2% spread Annual interest
2% 3% 5% total rate $500,000
4% 4% 6% total rate $600,000
6% 6% 8% total rate $800,000

A fall from a 3% benchmark to 2% produces no savings under these terms. The floor has already taken effect. A statement that each one-point decline saves $100,000 would be wrong for that move.

A different contract could place a 3% floor on the total rate instead. At a 2% benchmark plus a 2% spread, that other structure would charge 4%, or $400,000. That is a separate $100,000 difference created by the definition. Read the sentence that sets the floor before entering a rate into a model.

Interest-Rate Caps: What the Protection Covers

A rate cap can pay when a stated benchmark exceeds a selected strike rate. The strike is the level at which payment begins under the assumed terms. It is not necessarily a cap on the entire loan rate, and it does not include every financing cost.

Add a fictional cap to Harbor's original loan. It covers the full $10 million, uses the same benchmark and periods, and pays the amount by which that benchmark exceeds 4%. Assume all payments arrive when due. The loan still has its 3% benchmark floor and 2% spread.

At a 6% benchmark, gross annual loan interest is $800,000. The cap pays $200,000: two percentage points times $10 million. Net interest is $600,000 before the cap's price and other costs. At a 4% benchmark, the cap pays nothing, and interest is also $600,000. At 2%, the floor leaves loan interest at $500,000, with no cap payment.

Include the Price Without Counting It Twice

Assume the three-year cap costs $120,000 at the start. Put that cash use at the start. Do not call the $600,000 net interest figure the complete cost of financing, and do not silently deduct another $40,000 from cash in each of three years. Dividing the premium by three may help compare average cost, but it does not describe the assumed cash dates.

If the starting capital budget already includes the premium, preserve that link. Counting it again as an extra use in the same budget inflates costs. Leaving it out of both the capital budget and the comparison understates costs.

Check the Protected Amount

Now change only the cap amount to $8 million. At the same 6% benchmark, the cap pays $160,000. Loan interest remains $800,000, so the net is $640,000. The uncovered $2 million adds $40,000 compared with full protection.

That is partial coverage, not a failed calculation. The reader needs to know why the amounts differ and whether the difference is intended. A cap may also end before the loan. Its rate and amount can match perfectly today while leaving a future period exposed.

Interest-Rate Swaps: Match Both Sides of the Contract

A swap uses a different payment pattern. In a simple example, the borrower pays a fixed rate under the swap and receives a floating rate. Those receipts can offset the floating loan charge. Compare the loan and swap line by line instead of relying on the word hedged.

Use a new fictional $10 million loan with a benchmark-plus-2% rate and no floor. A matching swap requires the borrower to pay 3.5% and receive that same benchmark. The amounts, payment periods, and dates match. Combined interest is 5.5%: the loan's benchmark cancels against the swap receipt, leaving the 2% spread plus 3.5% fixed payment.

At a 6% benchmark, loan interest is $800,000, the fixed swap payment is $350,000, and the swap receipt is $600,000. Net interest is $550,000. At 2%, the figures become $400,000 plus $350,000 less $200,000, still $550,000. These simplified amounts exclude any price paid for the swap and other costs.

A Loan Floor Can Break the Simple Offset

Change only the loan by adding a 3% benchmark floor. Leave the swap's receipt tied to the actual benchmark, with no matching floor. At a 2% benchmark, loan interest is now $500,000. Add $350,000 paid under the swap and subtract $200,000 received. Net interest is $650,000.

The floor has left $100,000 that the swap receipt does not offset. This result belongs to this invented contract pair. It is not a claim that the named sample's swap has a floor mismatch. A signed contract review must establish the actual terms.

The notional is the amount used to calculate swap payments. It is not a cash reserve. Compare it with the loan balance throughout the term. A later principal reduction could create excess swap coverage; an added loan could leave part uncovered. Neither result can be judged from the original amounts alone.

There is also another party's promise to perform. The OCC defines counterparty credit risk in terms of possible failure to pay amounts due under a derivative. Its discussion is in a banking context, but the distinction matters here: the formula can work while collection remains a separate question. OCC, Counterparty Credit Risk.

Compare Financing Costs Under More Than One Rate Path

A fair scenario comparison holds the loan amount, time period, and cost scope steady. It also tests more than one path. A single rising-rate case can make a cap look attractive without showing what its upfront price does when rates stay low.

Return to Harbor's $10 million interest-only loan with its 3% benchmark floor and 2% spread. Compare three choices over three full years: the floating loan alone; that loan with the full matching 4% cap costing $120,000 at the start; and an alternative fixed 5.5% loan. Assume no other entry fees, principal changes, taxes, exit costs, or payment delays. These are selected interest-cost cases, not investment returns.

Chosen path Floating interest by year Floating total Capped interest plus premium Fixed interest total
Benchmark 4%, then 6%, then 3% $600,000; $800,000; $500,000 $1,900,000 $1,820,000 $1,650,000
Benchmark 2% in each year $500,000; $500,000; $500,000 $1,500,000 $1,620,000 $1,650,000

For the first path, capped interest is $600,000, $600,000, and $500,000. Add the $120,000 premium to reach $1,820,000. The cap reduces total selected cost by $80,000 versus floating alone. For the second path, it pays nothing and adds its full $120,000 price.

The fixed choice costs less in the first path and more in the second. That does not identify today's best loan. We assigned the rates and price, gave no odds to either path, and excluded other terms. An actual comparison needs the costs and rights offered to the borrower.

Show the Cash Date as Well as the Total

The capped choice needs $120,000 before the assumed annual interest periods. The fixed choice in this model has no added upfront cost. Equal totals would still leave different starting cash needs. A property already short of working cash might care greatly about that timing.

Do not turn the premium into a return figure by dividing it by investor equity and stopping there. It buys a defined contract, while investor results depend on property cash, other costs, and the exit. The SEC urges readers to check methods and excluded costs in performance presentations and to distinguish projections from actual results. SEC Performance Claims bulletin, September 15, 2022.

Hedge Expiration and DST Loan Maturity

Place the loan and hedge on the same calendar. Include the last protected interest period, the final payment under the hedge, the loan maturity, and the planned property sale. These dates answer different questions. A hedge payment arriving after its covered period is not necessarily new coverage.

Consider a separate fictional loan that matures on December 31, 2030. Its cap covers interest only through December 31, 2029. The property plan assumes a sale by the earlier date. If that sale slips, the calendar contains a full year with debt still outstanding and no protection from that cap.

Assume $10 million remains outstanding during the extra year. Without a floor, a benchmark move from 4% to 6% on a benchmark-plus-2% loan raises simple annual interest from $600,000 to $800,000. The $200,000 increase belongs in the delayed-sale case. It is not already covered merely because the investment once purchased a cap.

A line for a replacement cap needs a price, funding source, and terms. An estimated price is a scenario input, not a committed purchase. Check whether the lender requires replacement protection and what happens if its price is higher than planned.

The same work applies to an extension option. Separate the right to request an extension from a right that can be exercised after stated conditions are met. Record any fee, required paydown, coverage test, and hedge requirement from the actual documents. Do not insert an extra year at the old rate because it makes the plan balance.

Connect Debt Costs to Property Cash Flow

A change in interest matters because it changes cash left after the property pays its bills. Use a bridge that includes each cost once. Net operating income, or NOI, generally describes property income after operating costs and before financing. State your model's exact inclusions when using it.

In a separate fictional annual case, NOI is $1 million. Other cash uses are $100,000 and have not been deducted in NOI. Debt is interest only. With $600,000 of net interest, $300,000 remains before any unlisted costs. With $800,000 of net interest, only $100,000 remains.

Interest rises by one-third, but the remaining cash falls by two-thirds. If planned investor payments are $240,000, the first case has a $60,000 cushion. The second has a $140,000 gap. That gap is a funding problem to resolve, not evidence that a reserve or sponsor will automatically cover it.

Avoid Double Counting a Hedge Receipt

Suppose gross interest is $800,000 and the cap pays $200,000. You can show gross interest and the receipt on separate rows. Or you can deduct $600,000 of net interest. Both methods leave $300,000 after the other assumed uses. Do not deduct $600,000 and add the same $200,000 receipt again.

Timing can create a different problem. If a $200,000 receipt arrives after the interest must be paid, the annual net figure still misses a temporary cash need. Verify payment dates and account restrictions before treating an expected receipt as cash available for that day's bill.

Debt-service coverage is another useful view. With this model's $1 million NOI and $600,000 interest-only debt service, it is about 1.67. At $800,000 it is 1.25. Those are our simple ratios. A lender may define income, expenses, hedge receipts, and testing periods differently. Neither number establishes compliance with an unidentified covenant.

Early Sale, Loan Payoff, and Hedge Termination

An early property sale may end both a loan and a hedge. Review each contract's closeout terms and obtain dated figures for the same proposed sale. A favorable interest rate does not establish a favorable early exit price.

Use a separate fictional sale calculation. After selling costs, the property produces $16 million. The loan principal is $10 million. An assumed lender payoff quote adds $250,000, and a separate hedge closeout quote requires $180,000. That leaves $5.57 million before other claims and owner allocations.

Change only the hedge quote to a $70,000 receipt. The remainder becomes $5.82 million. The $250,000 difference between cases comes from moving from a $180,000 payment to a $70,000 receipt. Neither amount is a forecast; each is an invented quote input.

Check whether the lender's quote already includes the hedge closeout. If it does, do not add it again. Also check the good-through date, accrued interest, and any conditions. A quote for one date may not serve a later closing.

A premium paid when a hedge began is part of historical cost. It does not determine the amount due at an early end. Keep the original premium and the new quote in separate fields. If the quote is missing, label the exit result incomplete instead of substituting zero.

Review the Maturity Plan Before Calling a Loan Safer

Fixed interest can protect the budget during the loan term and still leave a large balance due later. The OCC's October 2024 guidance identifies refinance risk for loans with principal left at maturity, including interest-only real estate loans. The guidance addresses banks; it does not grant a DST permission to borrow again. OCC Commercial Lending: Refinance Risk.

For a DST, establish the legal route before modeling new debt as available. Revenue Ruling 2004-86 describes a particular trust whose trustee lacks power to renegotiate the acquisition debt. Its tax conclusions depend on the described facts. The actual trust documents and legal advice must address any proposed response to maturity. IRS Revenue Ruling 2004-86.

Even where a lawful financing route exists, enough new money is not assured. Consider a hypothetical borrower outside any assumed DST refinancing permission. It must repay $12 million. A potential lender applies a chosen 65% limit to a $16 million value, producing a $10.4 million maximum. Another chosen test allows $10 million based on income. The smaller limit controls, leaving a $2 million gap before new loan costs.

Those limits are invented, not industry standards. The example shows why quoting a new interest rate cannot settle the payoff question. The amount offered may be too small. A sale, paydown, extension, or other response needs its own authority, cash source, and consequences.

Also compare maturity with the property plan. A large lease event or repair project near maturity can affect cash or value at an awkward time. Rate protection cannot guarantee a buyer, preserve the building's price, or ensure a lender accepts a new loan request.

Build a Financing Comparison You Can Update

Use one row for each contract and one linked calendar for the property. Keep the documents, dates, and unresolved questions visible. A compact file is useful only if another reader can trace its numbers.

For each loan, record the borrower, principal balance and date, benchmark definition, spread, floor, payment rule, and maturity. For each hedge, record the parties, type, notional schedule, protected rate, covered periods, payment dates, upfront price, and early-end terms. Mark a field unknown when the evidence is missing.

Then choose a few questions that could change the decision. A floor mismatch calls for the exact rate definitions. An early hedge end calls for a delayed-sale case. An unclear payoff term calls for the governing documents and a dated quote. A broad request for “more information” is less useful than one that names the gap.

Retain the original assumptions when testing changes. Do not improve rent, lower the rate, extend the hedge, and raise the sale price in one revision without showing each step. Separate changes reveal which feature drives the result. A combined stress case can follow once the reader understands those effects.

Finally, state the conclusion at the level the evidence supports. You may establish that a disclosed swap matches the loan's stated amount and end date. That is narrower than verifying every payment term or today's contract status. You may establish that one chosen rate path costs less. That is narrower than forecasting the path or recommending the investment.

Frequently Asked Questions

Are fixed-rate loans always better for DST investors?

No. A fixed rate can make interest costs easier to plan, but the loan may have early-payoff costs and principal due at maturity. Compare the rate with the full payment schedule, property plan, and exit terms. A lower floating rate or a hedge also needs its costs and limits reviewed.

Does a floating-rate loan mean a DST is unhedged?

No. A separate cap or swap may offset some or all of a stated rate exposure. Read the related contract and check the amount, benchmark, dates, and payment rules. The loan label alone does not establish the net cash cost or the protection still in force.

Does an interest-rate cap include the loan spread?

Only if the actual terms provide that result. In this article's example, the cap pays when the benchmark exceeds 4%, while the loan adds a 2% spread. Net interest can therefore reach 6% before the cap's price and other costs. A benchmark cap is not automatically an all-cost limit.

Can a swap leave a borrower exposed when rates fall?

Yes, depending on the contract pair. A loan floor can keep the loan charge from falling while the swap receipt continues to decline. Our separate example shows that mismatch. It does not establish a flaw in either named offering; the actual loan and swap terms are required.

Why can a fixed-rate loan have different monthly payments?

The interest calculation may use actual days, so a longer month costs more on the same balance. Principal payments or other scheduled changes can also affect the cash due. Compare the rate, day-count rule, and payment calendar rather than assuming each month is one-twelfth of annual interest.

What happens if the hedge ends before the property sells?

The period after coverage ends needs a new analysis. Review the remaining loan terms, any replacement-hedge requirement, and the funding available for added costs. A planned sale date does not extend the contract. Do not assume a new hedge can be bought for the original price.

Can a DST just refinance when its loan matures?

That cannot be assumed. The trust's powers, loan terms, tax structure, and proposed transaction all matter. Have the lawful response established before treating new borrowing as available. Even with a permitted route, the loan amount and terms offered may leave a cash shortfall.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. Our work separates reported facts, assumptions, and unanswered questions so readers can assess the evidence behind an investment discussion.

Sources