Research guide

Delaware Statutory Trust 1031 Reviews: What a Review Should Explain About Debt and Equity

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

A DST review should show how property debt connects to the interest an investor plans to buy. It should also separate that investment analysis from the tax figures used in a proposed 1031 exchange. This article follows an invented two-offering example to explain ownership shares, loan balances, cash uses, and the records that support them. It ends with a practical handoff for the investor, tax adviser, and exchange team.

Table of Contents

Start With Three Different Questions

A one-page review might say that a DST offers enough debt for an exchange. That statement leaves several questions unanswered. Enough under which tax calculation? How was the investor's share found? What does the debt require the property to pay each year?

A useful review separates three tasks:

Task Question to answer Useful supporting record
Understand the investment How is this property funded, and what claims come before investor cash? Offering budget, loan documents, trust terms
Measure the proposed interest What share will this investor actually own? Subscription terms, ownership schedule, final purchase confirmation
Evaluate the exchange How do the actual facts affect this taxpayer's exchange? Closing records, debt details, basis records, professional tax analysis

The tasks share numbers, but they do not produce the same conclusion. A correct ownership fraction does not settle tax treatment. A tax answer does not show that property income can support the loan.

Private offerings may also provide less information than public investments. The SEC explains that a private placement memorandum, or PPM, generally is not reviewed by a regulator. A polished financing summary therefore needs its own supporting records. It does not mean an agency approved the deal. SEC private-placement bulletin, updated September 21, 2026.

Meet Beth, an invented investor. Brookfield Court DST and Cedar Market DST are also fictional. Their figures teach the review method. They do not describe current deals, suggest a debt target, or estimate a reader's tax result.

Build the Old-Property Cash Ledger

Begin with the property being sold. A review of the new DST cannot fill gaps in the old closing statement.

Suppose Beth's sale has the following invented cash figures:

Old-property item Amount
Sale price $3,200,000
Loan payoff −$1,150,000
Other closing cash uses −$160,000
Cash left after these uses $1,890,000

The subtraction is straightforward: $3.2 million less $1.15 million less $160,000 leaves $1.89 million. The difficult part is deciding what each line means for the exchange.

The $160,000 is only a cash-use total in this example. Its parts could include exchange costs, loan costs, prorations, or other items. We have not decided how they should be treated. We also have not supplied Beth's tax basis, the amount used to measure gain under the tax rules. The table therefore does not establish a legal reinvestment minimum, taxable gain, or the amount a tax return should report.

A review should retain both the detailed closing statement and the simplified ledger. The summary helps someone follow the money. The detail lets the tax adviser decide which amounts receive which treatment.

Check whether the payoff is a lender's final figure or an earlier estimate. A quoted payoff may include items beyond principal. Do not label the full wire “principal balance” unless the source supports that label. Record the date through which the quote applies and the actual settlement date.

Then follow the cash. Identify the amount received by the qualified intermediary, any amount paid elsewhere, and any additional money Beth plans to contribute. A qualified intermediary helps carry out the exchange under its agreement. Its account balance still needs to be reconciled with the transaction records.

Beth's $1.89 million is a starting point for the examples below. It is not permission to treat all closing cash uses alike or to assume that sending the entire balance into DSTs resolves every exchange issue.

Read the DST Capital Structure

The capital structure is the way an investment combines owners' money and borrowed money. Start at the whole-offering level before calculating Beth's slice.

For this example, assume each fictional offering has one ownership class. The stated equity amounts are fully funded, and the loan amounts are funded principal. There are no other debts or preferred ownership classes in the model.

Funding source Brookfield Court Cedar Market
Investor equity $20,000,000 $30,000,000
Property loan $16,000,000 $12,000,000
Total funding $36,000,000 $42,000,000

These are sources of money. A second schedule must explain where that money goes. Without both schedules, a review can describe the loan and still leave the acquisition budget unexplained.

In an actual packet, distinguish a maximum offering amount from money already raised. Distinguish an approved loan commitment from funds already drawn. If a loan includes a future advance, ask what conditions govern that advance. A promise to lend later should not silently enter today's funded-debt column.

The reviewer should also identify the legal entity tied to each amount. A sponsor's corporate debt is not automatically the DST's property debt. An affiliate loan to a tenant belongs on that tenant's record unless documents establish a different relationship. The shared brand does not join the balance sheets.

A capital table should make any missing layer visible. It might state, “The senior property loan is documented; a referenced affiliate advance has not been explained.” That is more useful than a total labeled “all debt” when one component remains unknown.

The term equity also needs a label. Here it means the money investors pay to buy interests. It does not mean that the property could be sold today for a price that would return that full amount after debt and costs.

Calculate the Investor Share With the Right Denominator

Assume Beth plans to invest $1.2 million in Brookfield Court and $690,000 in Cedar Market. Together, those amounts use the $1.89 million from the cash ledger.

Under this model's one-class, fully funded terms:

  • Brookfield share: $1,200,000 ÷ $20,000,000 = 6%.
  • Cedar share: $690,000 ÷ $30,000,000 = 2.3%.

Applying those shares to the stated loans gives this proposed economic allocation:

Proposed interest Beth's cash Ownership share Share of property debt
Brookfield Court $1,200,000 6% $960,000
Cedar Market $690,000 2.3% $276,000
Combined $1,890,000 Separate shares $1,236,000

The last column is a calculation under our stated assumptions. It is not a finding about debt treated as assumed for tax purposes, a personal loan commitment, or an amount Beth can withdraw.

The review should show how the real ownership schedule works. A cash amount divided by maximum equity can be wrong if the documents use units, adjusted purchase prices, different classes, or another allocation method. A commission adjustment also needs its actual ownership terms. Do not invent more units simply because a buyer pays less cash.

Ask for a written match among the proposed subscription amount, units or percentage, and related debt figure. Record whether the result is preliminary or final. If the offering has not finished raising funds, explain which denominator is intended to remain fixed and which could change.

Beth's two percentages should never be added to claim she owns 8.3% of a combined property pool. They describe different pools. Dollar amounts can be combined here because the schedules identify a common owner and the same proposed transaction stage.

The $1.236 million debt total exceeds her old $1.15 million payoff by $86,000. That is arithmetic only. The review still needs the tax adviser's treatment of the actual liabilities, cash, property, costs, and taxpayer facts.

Separate Property Price, Costs, and Reserves

Now examine the use of the $78 million raised by both fictional offerings. The model allocates their capital as follows:

Use of funds Brookfield Court Cedar Market
Property purchase price $33,500,000 $39,000,000
Entry costs $1,500,000 $1,800,000
Opening cash reserves $1,000,000 $1,200,000
Total uses $36,000,000 $42,000,000

Each column balances with its funding sources. That confirms the budget's arithmetic. It does not classify the spending for tax purposes or verify the property's fair market value.

Beth's share of each use reveals why the labels matter:

Beth's proposed share Brookfield Court Cedar Market Combined
Property purchase price $2,010,000 $897,000 $2,907,000
Entry costs $90,000 $41,400 $131,400
Opening reserves $60,000 $27,600 $87,600
Total allocated budget $2,160,000 $966,000 $3,126,000
Less proportional debt −$960,000 −$276,000 −$1,236,000
Equity contributed $1,200,000 $690,000 $1,890,000

Beth's $3.126 million allocated budget includes three different uses. Calling it all “real estate value” would erase $131,400 of costs and $87,600 of cash reserves from view.

Nor can the review simply compare that budget with the old $3.2 million sale price and declare the exchange complete or deficient. The tax analysis needs the proper treatment of the actual amounts. This example has deliberately not supplied those legal classifications.

The reserve line deserves special care. It is cash set aside within the model, not an immediate cash distribution to Beth. If it pays later expenses, the review must track that use rather than counting both the reserve and the expenses as separate new benefits.

For the tax handoff, break broad cost categories into their components. A single “acquisition costs” total may combine services, financing charges, and other items. The review should provide the records needed to classify them without deciding that every dollar has the same treatment.

Explain What Each Debt Ratio Measures

A debt ratio needs a clear denominator: the amount you divide by. Brookfield can have several accurate percentages at once:

Brookfield measure Calculation Result
Debt divided by contributed equity $16 million ÷ $20 million 80%
Debt divided by total funding $16 million ÷ $36 million 44.44%
Debt divided by property purchase price $16 million ÷ $33.5 million 47.76%

These percentages answer different questions. None uses an appraised property value. The review should not relabel them as an independently verified loan-to-value ratio.

For Cedar, debt divided by contributed equity is 40%. Beth's $690,000 contribution therefore links to $276,000 of debt under our model in which debt follows the ownership percentage. That does not mean the property loan is 40% of the purchase price; $12 million divided by $39 million is about 30.77%.

Keep the measurement date beside each ratio. Original loan principal divided by today's property estimate blends two dates. That may be an intentional stress test, but it is not a current balance-sheet ratio unless both inputs support that description.

Avoid a “safe below this percentage” verdict based on this article's examples. The ratios leave out property income, tenant quality, loan terms, costs, and the price at which the property might be sold. A lower ratio might require Beth to consider a different mix of cash and property debt. That tax question and the property risks each need their own evidence.

Give the Tax Adviser the Actual Exchange Inputs

The tax question is broader than replacing a mortgage dollar for dollar. Debt taken on by another party can be treated as money received when finding the limit on taxable gain. IRS Publication 544 also explains offsets. They can include debt you take on, cash you pay, and certain other property you give up. IRS Publication 544, 2025 edition, “Assumption of liabilities”.

That is why a review should report both debt and additional cash. It should not claim that every exchange needs new debt equal to the old loan.

One net-cash figure cannot capture these rules. Form 8824's instructions address cash received and net liabilities on separate terms. Taking on more debt does not simply cancel cash received in that calculation. The rules for debt treated as assumed also differ by debt type: recourse or nonrecourse. IRS Form 8824 instructions, 2025 edition, lines 15–18.

For Beth, assemble the actual records before asking for a conclusion. Her file needs the old transfer details, adjusted tax basis, debt payoff breakdown, cash movements, new ownership terms, new liability details, and costs. It also needs the ownership identity and the other facts relevant to her exchange.

An extra-cash alternative should be documented as an alternative. If Beth wants less property debt and will contribute personal funds, ask the adviser to evaluate that specific transaction. Do not alter a debt cell and assume the rest of the exchange remains unchanged.

Likewise, keep a cash-withdrawal request visible. If Beth wants money back for household needs, the review should state that request plainly. Hiding it inside a larger debt total prevents the professional from evaluating the transaction she actually wants.

The review's job is to show where each input comes from. The tax conclusion should identify which facts were confirmed, which were assumed, and what must be checked again at closing.

Identify the Borrower and Any Personal Obligations

A share of debt describes exposure under an ownership model. It does not identify who signed the promissory note or who may owe money under a guarantee.

Make a small entity map. Name the property owner, borrower, lender, trustee, manager, and any guarantor. Describe a role only when a record supports it. If the packet refers to an affiliate guarantee without providing it, mark that document as missing.

Then separate three questions:

  1. Who must make the scheduled payments under the loan?
  2. Which property or other assets secure repayment?
  3. Can another person or entity owe money under a separate promise or a stated exception?

The last question deserves the actual document language. A brief label such as “nonrecourse” is not a full account of every party's contract. Ask counsel to explain the relevant promises, exceptions, and parties. Do not infer Beth's personal duties from a marketing summary or from another DST's loan.

The review should also explain how debt risk can reach an ownership interest even when the investor is not the named borrower. In our invented budget, the loan is paid before the residual cash available to equity. If that cash shrinks, Beth's modeled payout shrinks. No claim against Beth personally is needed for that economic effect.

Keep tax treatment separate here as well. Whether a liability is treated as assumed in an exchange and whether a lender can pursue an individual are different questions. The file should contain the professional answers to both rather than reuse one short label for each.

Connect Debt Service to Investor Cash Flow

A loan balance says little about the cash left for investors this year. The review also needs the payment schedule and the property cash that will support it.

Consider a separate one-year budget for our fictional holdings. All amounts in the table are for the whole offering. Operating cash is after property operating costs but before the listed financing, trust costs, and reserve funding. There are no other cash sources or uses in this simplified year.

Annual budget item Brookfield Court Cedar Market
Operating cash before listed uses $1,500,000 $1,800,000
Interest −$880,000 −$600,000
Other trust cash costs −$100,000 −$120,000
Cash moved into reserves −$200,000 −$240,000
Cash left for modeled distributions $320,000 $840,000

Interest uses invented simple annual rates of 5.5% on Brookfield's $16 million and 5% on Cedar's $12 million. Both loans are interest-only for this modeled year. A real loan's payment dates and day-count method may produce different amounts.

Beth's shares of the remaining cash are $19,200 and $19,320, totaling $38,520. That is about 2.04% of her $1.89 million contribution. It is an assumed one-year cash result, not a promised payout or total investment return.

Now change only Cedar's payment schedule in a separate branch. Suppose Cedar must also pay $300,000 of principal at year-end. With the same other figures, distribution cash falls from $840,000 to $540,000. Beth's share falls from $19,320 to $12,420, a $6,900 decrease.

That principal payment also lowers Cedar's loan balance by $300,000 in this branch. A later exit model would need the smaller payoff. Counting the repayment as an annual cash use and then retaining the old debt balance at sale would miss that benefit. Conversely, adding the repaid principal as a second cash distribution would count money Beth did not receive.

These branches are teaching cases. They do not predict what either real property or an actual lender would allow.

Review Maturity, Extensions, and Repayment

A review should put the loan's required end date next to the proposed investment exit. The relevant question is what must happen if the property's planned sale does not happen on time.

The OCC's October 2024 bulletin discusses refinance risk when principal remains due at maturity. Its guidance is directed to banks. It does not give a DST permission to refinance, promise a lender will extend, or establish the rights in a particular trust. OCC Bulletin 2024-29, “Commercial Lending: Refinance Risk”.

A useful loan calendar shows when the balance is due. It also lists rate changes and the date any principal payments start. Put any written extension terms on that calendar. An option already in a contract is different from a future request that a lender could reject.

If an extension requires a fee, a cash deposit, or a financial test, include that condition in the review. The word “extension” alone does not explain whether the trust can use it or where the needed money would come from.

Trust powers also require a separate reading. Revenue Ruling 2004-86 addresses a particular trust structure with stated limits on its activities and powers. Its conditional tax holding is not a general license to change every DST's debt terms. Nor should a review turn its particular facts into an unsupported statement that all DSTs face identical rules. IRS Revenue Ruling 2004-86.

Ask the reviewing attorney to connect the relevant loan action with the trust terms and tax analysis. A property manager's preferred plan is only one part of that answer.

Finally, distinguish expected loan payoff from property sale proceeds. A projected sale price is not the amount available to Beth. The exit budget must address debt, sale costs, other obligations, and remaining cash before it reaches an investor distribution.

Trace Reserves and Lender Controls

A reserve balance can support a plan only if the plan can use that cash. Ask who holds it, what it may pay, and whose consent is needed.

For example, a tax escrow, a repair reserve, and unrestricted operating cash may have different uses. A review that adds all three and calls the result “available cash” needs to show why that treatment is justified.

Consider a separate fictional reserve test. A trust has $400,000 of cash. Of that, $250,000 is held for specific lender-approved repair work and $150,000 is available for general operations. The next general operating cash gap is $180,000.

The trust has a $30,000 gap against the $150,000 general pool. The total $400,000 balance does not resolve it unless the repair funds can lawfully and practically be released for that purpose. This example assumes they cannot. It does not assert a breach of a loan covenant, which is a condition in the loan contract.

The review should preserve that distinction in its conclusion. “Cash exists” and “cash can meet this use on this date” are different findings.

When explaining a lender control, name the trigger and the effect. Does a test redirect cash or require a reserve deposit? Does it restrict payouts or create another result? Copying the ratio alone leaves the reader unable to judge its practical meaning.

Use the actual measurement rules. A lender's defined cash-flow test may exclude or adjust items that appear in the sponsor's operating forecast. Recalculate only after the definition and period are clear. If they are missing, a blank result is more accurate than a ratio built from convenient numbers.

Recheck Debt and Equity After a Change

Debt and equity figures can change between an early review and a final purchase. A review should state what must be updated, not merely attach the latest file.

Return to Brookfield's original funding model. In a separate revised budget, assume the loan falls from $16 million to $15.5 million. The property price and entry costs stay the same. Opening reserves fall from $1 million to $500,000. Equity remains $20 million, so total sources and uses both fall to $35.5 million.

Beth's ownership share remains 6% under this revision. Her share of debt falls from $960,000 to $930,000. Adding unchanged Cedar debt of $276,000 gives $1.206 million, a $30,000 decrease from the original combined allocation.

Her share of Brookfield's opening reserve also falls by $30,000, from $60,000 to $30,000. This is why a lower loan balance cannot be reviewed in isolation. In this revised budget, the cash cushion changed too.

Do not carry the original annual cash table forward automatically. The interest calculation, reserve plan, and other assumptions need a fresh review. We have not modeled those effects in this revision.

A second possible change would be different: equity could rise to replace lower debt while reserves stay intact. That would change the ownership denominator if Beth kept the same dollar investment under these proportional terms. It is a different proposal, not another description of the first revision.

For each change, list the old and new values, the source, and the effective date. State which findings need to change. Mark unanswered questions as open. FINRA's notice calls for independent research and follow-up when reports conflict or lack needed facts. It addresses duties of covered member firms. This worksheet does not certify that a firm has met them. FINRA Regulatory Notice 23-08, May 9, 2023.

Prepare a Useful Professional Handoff

The final handoff should let another person reproduce the review without guessing which version was used. A compact cover page can point to the detailed records.

Start each offering record with its legal name, property, and source dates. Then show the proposed cash purchase and the units or percentage it buys. Include the total equity, loan balance, and the investor's calculated share of debt. Mark which numbers are proposed, backed by records, or confirmed at closing.

Attach the sources rather than flattening them into one unexplained total. The loan pages should name the borrower and lender. They should show the assets pledged, rate, payment schedule, and maturity date. Include any terms that matter to the proposed plan. The capital budget should reconcile sources and uses. The ownership record should show how the proposed interest is measured.

Give the tax adviser a separate set of facts about the exchange. Show who the taxpayer is. Include the old-property records and tax basis details. Add the actual cash movements, costs, and new interest documents. Ask which facts need to be confirmed before the adviser can give a final answer.

Keep a short open-item list with a named next step. “Debt needs review” is vague. “Obtain the final funded loan statement and confirm whether the ownership schedule uses that balance” is actionable.

Record responses at the level of the question. A confirmation of the unit count does not close a question about loan recourse. A corrected payoff does not settle the treatment of every closing cost.

Retain earlier versions when they explain a change. Label them clearly so no one mistakes the older $960,000 Brookfield debt share for the revised $930,000 figure. The history should help someone follow the decision rather than bury the current answer.

Write a Conclusion That Matches the Evidence

A useful conclusion has two parts. The investment portion explains what the debt and equity records show about funding, payment demands, cash controls, and the proposed ownership interest. The exchange portion identifies the figures sent for professional tax analysis and the status of that analysis.

For Beth's original model, the review can reproduce $1.89 million of contributions and $1.236 million of property debt allocated under its assumptions. It can also explain the $131,400 cost allocation and $87,600 reserve allocation within the broader budget. Those are supported model results.

It cannot use them to certify Beth's exchange, establish tax basis, guarantee distributions, or conclude that either loan will be repaid without loss. Those claims require facts and analysis that this illustration does not supply.

The final sentence should make the next decision clear. It might identify a missing closing figure, a contract question for counsel, or a revised budget that needs new cash-flow work. The purpose of the review is to expose those dependencies before the investor relies on a debt number that looks precise but answers only part of the question.

FAQ

Does the new DST debt have to equal the old property loan?

Do not use that as a universal rule. IRS guidance addresses liabilities alongside cash and other exchange facts. Additional cash can matter under the applicable net-liability rules. Have the tax adviser evaluate the actual transaction rather than treating a mortgage comparison as the full test. IRS Publication 544, 2025 edition.

Is my proportional debt share money I receive?

You do not receive cash just because a worksheet assigns part of a property loan to your interest. In Beth's example, the loan helps fund the offering. Her proportional amount is a model input. Whether and how debt is treated for tax purposes requires a separate analysis.

Can I find my ownership share by dividing my investment by total equity?

That works in this article because the example expressly uses one class, fully funded equity, and ownership in direct proportion to cash paid. Real documents may use units or other terms. Confirm the method, denominator, and final purchased interest before using the result.

Does nonrecourse debt remove the investment risk?

A label does not establish every party's legal duties. It also does not protect the modeled cash left for equity from loan payments or property losses. Review the actual loan, guarantees, and exceptions with counsel. Keep personal liability and the property's economic exposure as separate questions.

Can an all-cash DST automatically solve the debt issue in my exchange?

An unleveraged offering changes the financing facts; it does not supply a complete tax answer. The adviser still needs the old liabilities, cash paid or received, costs, ownership facts, and other exchange inputs. Assess the specific proposed transaction, including any additional personal cash.

Why does the review need the source-and-use budget?

It shows where investor equity and loan proceeds go. Beth's budget includes property price, entry costs, and reserves. Without that breakdown, a reader could mistake total funding for property value or count reserved cash twice. Balanced arithmetic is useful, though it does not decide tax treatment.

What should trigger a fresh debt-and-equity review?

A change in the funded loan or ownership terms can affect earlier results. So can a change in total equity, purchase amount, costs, or reserve funding. New payment dates can matter even if the loan balance is unchanged. Find the changed input and rerun the parts of the review that use it.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. This educational library explains how to examine offering records, compare evidence, and prepare focused questions for qualified professionals.

Sources