Research guide

Delaware Statutory Trust Fees: How Debt-Related Costs Affect the Capital Stack

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

This article explains how borrowing costs fit into the money used to acquire and operate a DST property. It separates loan fees from interest, principal payments, rate protection, and cash held in reserve. A fictional closing shows why the stated loan amount can differ from the lender's cash wire without reducing the debt owed. The later examples trace those same distinctions through operating cash and a property sale.

Table of Contents

Start With the Capital Stack and the Closing Budget

The capital stack describes the sources of money and the claims attached to them. A simple property purchase may use a mortgage loan and investor equity. The loan creates a repayment claim under its documents. Equity supplies the rest of the required money and receives the remaining economics under the offering's terms. These are different roles, even when both help fund the same closing.

A sources-and-uses schedule answers a related question: where does each dollar come from, and where does it go? Sources may include the gross loan and investor subscriptions. Uses may include the purchase price, fees, reserves, and other closing items. The totals should reconcile. A purchase price alone rarely supplies enough information to check the entire schedule.

Start with the gross amounts before trying to rank costs. A summary may show the loan's stated principal, while a closing statement shows only the cash delivered after deductions. Both figures can be correct. They cannot be mixed in one model without adjusting the uses that explain the difference.

The review also needs a clear boundary. This article concerns selected property-level borrowing costs and their effect on cash. It does not calculate a household's tax result, exchange debt replacement, or personal guarantee exposure. Those questions need their own facts and documents. A dollar labeled “debt” in a capital stack does not settle them.

The SEC's fee bulletin points investors to offering documents, account records, and fee disclosures. It also distinguishes product charges from fees for investment services. For a DST, that supports reading the property financing and the investor's account arrangement as separate records. An account statement alone may not explain every cost within the property budget. SEC fee bulletin.

Separate Loan Fees From Other Borrowing Cash Uses

A loan origination fee pays for arranging or originating the borrowing under the agreed terms. Its label does not tell you the amount, who receives it, or whether another charge is included. The Fannie Mae multifamily guide defines an origination fee by its underwriting and origination role and addresses fees under its own guide and pricing rules. That is a program-specific reference, not a universal DST fee schedule. Fannie Mae multifamily guide, Fees.

Other financing-related charges can have different recipients. A mortgage broker may receive a fee for arranging the loan. Counsel may charge for loan documents and closing work. Reports may support the lender's review. The offering could also disclose compensation to a sponsor affiliate for financing services. Read the actual agreement before combining these entries.

Interest is the charge for using borrowed money over a stated period. Principal repayment reduces the amount borrowed. Neither should be quietly added to an origination-fee subtotal and then deducted again as debt service. A total can be arithmetically correct yet misleading if its label mixes these categories.

A deposit or reserve has a different role again. Cash held for later taxes, repairs, or another purpose remains a cash allocation subject to its restrictions. Funding that account uses closing cash. It does not, by itself, mean the same amount has already been paid to a service provider as a fee.

Rate protection also deserves its own line. A payment for a rate-cap contract buys a defined financial contract. The premium is a cash use, but the contract has terms, dates, and possible payments that differ from a lender's origination service. Calling every financing-related use a “loan fee” hides those differences.

Keep both a broad cash-use view and a narrower fee subtotal. The broad view helps reconcile the closing. The narrower view helps explain who is being paid for which service. Neither view should erase the other. A reviewer should be able to move from the total back to every individual line without guessing what was included.

Build the Fictional Rivergate Sources and Uses

Assume a fictional Rivergate offering buys a property for $30 million. It uses an $18 million loan and raises $14 million of investor equity. These are invented teaching terms, not a real loan quote or a statement of typical DST pricing. The loan amount and equity together provide $32 million.

The following uses consume or allocate that full amount. Every line is separate in this example. In a real closing, a package fee may include services that appear elsewhere in a summary. That inclusion question must be resolved before copying the table into a review.

Use of funds Assumed amount Role in this example
Property purchase price $30,000,000 Payment for the property
Property closing costs outside the loan package $300,000 Separate transaction costs
Offering and sponsor charges outside the financing lines $600,000 Separate disclosed charges
Loan origination fee $180,000 1% of the $18 million loan
Mortgage brokerage fee $90,000 0.5% of the $18 million loan
Lender legal and document costs $60,000 Assumed separate charge
Reports obtained for financing $40,000 Assumed separate charge
Initial rate-cap premium $120,000 Purchase of the assumed cap contract
Prepaid interest $30,000 Interest for a separate closing period
Restricted lender escrows $400,000 Cash held for specified future uses
Unrestricted opening cash $180,000 Cash retained by the offering
Total uses $32,000,000 Equals total sources

The four selected financing service charges total $370,000: origination, mortgage brokerage, lender legal work, and reports. Adding the cap premium and prepaid interest produces $520,000 of selected financing payments. Adding the restricted lender escrows makes $920,000 of financing-related closing uses. These are different subtotals with different meanings.

The $580,000 combined cash allocation consists of $400,000 restricted and $180,000 unrestricted. It is not all available for investor distributions. Nor is it all a fee. The restrictions determine when the $400,000 can be used or released. A heading that simply says “reserves” would conceal the difference between those two balances.

The property needs $12 million beyond the gross loan to reach its $30 million purchase price. The offering raises $14 million because the other uses total $2 million. That difference is not proof of an unexplained markup. The schedule explains where it goes. Whether each cost is justified is a further question that the reconciliation alone cannot answer.

Do not infer the property's market value from the $32 million total. The total includes costs and cash allocations beyond the purchase price. An appraisal uses its own evidence and effective date. A balanced closing budget proves that the modeled sources fund the modeled uses; it does not prove that investors received fair value.

Reconcile Gross Debt With Net Loan Proceeds

Now assume the Rivergate lender withholds $800,000 from its closing wire. The deductions are the $370,000 financing service charges, $30,000 prepaid interest, and $400,000 restricted escrows. The lender delivers $17.2 million in cash. The stated loan principal remains $18 million under the assumed note.

There are two consistent ways to present this closing. The first shows $18 million of gross debt plus $14 million of equity, for $32 million of sources. It also shows all $32 million of uses, including the $800,000 settled or held by the lender. This is the table above.

The second shows only the $17.2 million lender wire plus $14 million of equity, for $31.2 million of cash available outside those withheld items. Its uses must omit the same $800,000 already settled or held by the lender. The remaining uses also total $31.2 million. It is a narrower cash-wire view of the same closing.

Mixing the two methods creates a false shortfall. If the reviewer uses the $17.2 million net wire as the loan source but leaves all $32 million of gross uses in the table, the model appears to be short $800,000. That difference is a presentation error in this example, not missing investor money.

The reverse error is just as serious. Showing $18 million of loan sources while removing the lender-paid uses creates apparent spare cash of $800,000. That cash is not available. Part went to charges and prepaid interest, while part sits in restricted accounts. The wire detail explains the movement.

A fee withheld from proceeds does not automatically reduce principal. Rivergate must still repay the stated debt under the note. Confirm the face amount, amount funded, deductions, and balance owed. Those four fields can differ for valid reasons. Using only the bank deposit gives an incomplete picture of the borrowing.

This review should also account for deposits paid before closing. If a $25,000 report deposit is credited against the assumed $40,000 report charge, the remaining payment is $15,000. The total report cost remains $40,000. Adding the deposit to the full charge would report $65,000 and count the same $25,000 twice.

Check the Base Used to Calculate Each Financing Fee

Rivergate's assumed 1% origination fee uses the $18 million loan amount, producing $180,000. It does not use the $14 million investor raise or the $30 million property price. A percentage without its base is not enough to check an invoice. Write the base beside the rate every time.

The selected $370,000 financing service subtotal can be expressed in several ways. It equals about 2.06% of the loan, 2.64% of equity, or 1.23% of the purchase price. Those are reviewer calculations using different denominators. They are not three different contractual fees and must not be added together.

The equity denominator can help explain the burden on investor capital. It does not change what the lender agreed to charge. The contract remains the authority for the fee formula. Keep the agreed calculation separate from a common-denominator comparison prepared for readers.

A higher loan amount can increase a percentage-based charge even when its rate stays fixed. If a 1% fee applies to $20 million instead of $18 million, it rises from $180,000 to $200,000. The $20,000 increase comes from the larger base. It is not a rate increase from the lender.

A commitment fee might use the approved maximum, while another charge could use the amount actually funded. Those are possible contract designs, not assumptions to apply to every loan. If $20 million is committed but only $18 million is funded, a 1% charge would differ by $20,000 between those bases. The relevant agreement decides which applies.

For a simple investor allocation, suppose a $250,000 investment receives exactly its proportionate economic interest in Rivergate's $14 million equity. The share is about 1.7857%. Applying that share to the $370,000 subtotal gives about $6,607.14. This is an assumed economic allocation within the offering, not a separate invoice to the investor or a statement of actual ownership rights.

Debt ratios need the same care. The $18 million loan is 60% of the $30 million purchase price. It is 56.25% of the $32 million total closing budget. The second ratio uses total cost, not property value. Calling both “loan to value” would make the financing look different merely by changing the denominator.

Understand What Financing a Fee Changes

Saying that a fee is “financed” describes its funding, not its disappearance. More borrowing can provide cash for a cost, but it also changes the debt that must be serviced and repaid. The closing budget should show the cost and the source used to fund it.

Use a separate simplified example to see the effect. Assume a borrower needs exactly $18 million of net loan cash. The only deduction is an origination fee equal to 1% of the loan's face amount. There are no other charges, reserves, taxes, or credits in this illustration. The Rivergate table is not being changed.

The required face amount solves a simple equation: 99% of the loan must equal $18 million. Dividing $18 million by 0.99 gives about $18,181,818.18. The fee is about $181,818.18, leaving $18 million after rounding to cents. The face amount exceeds the usable cash because the loan must also fund its own fee.

Simply adding 1% of the desired net cash does not solve that same contract. A loan of $18.18 million would carry a 1% fee of $181,800. Its net cash would be $17,998,200, leaving a $1,800 gap. The fee base matters even in a small funding adjustment.

If both loans in this separate example bear 6% simple annual interest on an unchanged balance, the additional $181,818.18 of debt adds about $10,909.09 of annual interest. That is an illustrative financing effect. Actual interest depends on the note, day count, payment dates, rate changes, and principal schedule.

Borrowing capacity also has limits. A lender may not agree to increase the note just because a cost needs funding. The offering may instead need more equity, a lower price, a reduced use, or another permitted source. Do not quietly assume that every unexpected fee can be added to the debt.

An investor review should show both versions if the financing choice changes. Compare the original and revised face debt, net proceeds, fees, equity need, and future payments. A lower equity raise can look attractive while leaving investors with more debt exposure. The funding decision needs more than a single fee percentage.

Keep Interest and Principal Out of the Fee Subtotal

Return to Rivergate's original $18 million loan. For an isolated operating-year example, assume 6% interest for one full year on that unchanged balance. Interest is $1.08 million. Assume a $180,000 principal payment occurs at the very end of the year. Total cash debt service is then $1.26 million, and ending principal is $17.82 million.

These assumptions are chosen to make the timing clear. They are not an amortization quote. If principal were repaid during the year, the interest calculation might differ. If the rate floated or the note used a particular actual-day convention, a simple annual multiplication might not reproduce the lender's bill.

Principal is a cash use with a balance-sheet effect. The $180,000 payment reduces cash now and reduces the assumed debt owed later. Interest uses cash without reducing that principal balance. Combining the two can help plan payments, but a fee review should still identify which part is which.

Now assume Rivergate generates $1.65 million of net operating income for that year. This is property income after the modeled property operating expenses and before the borrowing and other below-NOI uses listed next. Assume the following additional cash uses are separate and not already included in NOI.

Operating cash bridge Amount
Net operating income $1,650,000
Less interest ($1,080,000)
Less year-end principal payment ($180,000)
Less planned capital work ($90,000)
Less trust-level fees ($45,000)
Less addition to cash reserves ($55,000)
Remaining modeled cash $200,000

The $370,000 closing service fees are not deducted again in this operating-year cash bridge. They were funded at closing. An accounting schedule may recognize a cost over time, but that does not by itself show another cash payment. This article follows cash movements; it does not prescribe accounting or tax treatment.

The OCC's real estate lending handbook distinguishes cash-flow analysis from underwriting measures and notes that covenant definitions may differ. That is useful context for keeping each measure labeled. This invented bridge is not Rivergate's legal distribution formula, a bank covenant test, or a promise that the remaining cash will be paid. OCC Commercial Real Estate Lending, printed page 42.

The prepaid $30,000 interest in the closing table covers a different assumed period. The full operating year here begins after that period. If a real forecast overlaps the two periods, reconcile the overlap before adding the amounts. A useful cash bridge names its dates as carefully as its dollars.

Track Rate Protection and Restricted Cash Separately

The original $120,000 cap premium is paid at closing in Rivergate's fictional budget. It is separate from the four service fees. The example does not specify the cap's strike, duration, covered balance, or payout formula. Without those terms, the premium alone tells a reader very little about the protection purchased.

Do not assume that a cap fixes every financing cost. Read which rate it covers, when it ends, and whether the loan's balance and term fit the contract. A source might also describe a swap or another arrangement. Different contracts need different analysis; the word “hedge” is not a complete description.

Consider a separate planning case in which a replacement cap would cost $150,000 in a later year. That is a chosen scenario, not a market quote. If a permitted account already holds $90,000 for that purchase, the modeled funding gap is $60,000. The $90,000 is used once, and the replacement cost is used once.

A broad reserve total cannot resolve that gap unless the relevant cash is accessible. Suppose another $100,000 is restricted to repairs under the assumed documents. Adding it to the cap fund would make the funding plan look comfortable, but the model has not established permission to use it. Keep the repair balance out until the conditions support a transfer.

The same discipline applies to Rivergate's $400,000 lender escrows. The closing entry shows where money was placed. Later statements should show releases, required additions, payments from the account, and remaining balances. Counting the original deposit as a fee and then counting every later escrow payment as another fee overstates total costs.

An escrow release also needs context. If $50,000 moves from a restricted account into operating cash, total cash has not increased by $50,000. Its location or availability changed. If that money then pays a qualifying bill, the payment is the next movement. A transfer and an expense are not the same event.

The record should connect the opening balance to the closing balance. For example, $400,000 plus $40,000 of later deposits, less $140,000 of payments, leaves $300,000. Ignore interest for this simple illustration. The $300,000 is the resulting balance, not another charge and not automatically available to equity holders.

Read Debt Costs at Sale Without Charging Them Twice

A sale model starts with the debt actually expected to remain at the sale date. It should not automatically use the original loan amount or the lender's original net wire. Those numbers describe different moments. Use the current balance and a payoff statement appropriate to the assumed closing date.

Take a separate Rivergate sale illustration with a $32 million sale price. Assume the outstanding principal is $17.82 million, as in the earlier year-end example, with no further principal changes. Assume selling costs are 2% of price, a supplied prepayment charge is $360,000, and other separate exit costs are $140,000. These are chosen inputs, not a market forecast or loan formula.

Selling costs are $640,000. Subtracting those costs, principal, the prepayment charge, and other exit costs leaves $13.04 million. If $300,000 of escrow cash is then released and $80,000 of separate operating cash is available, the modeled total rises to $13.42 million. Those balances must be separate and actually releasable for the illustration to hold.

The closing service fees of $370,000 were already funded in the original equity requirement. Deducting them again from the $13.42 million would incorrectly reduce this sale cash result to $13.05 million. Past fees matter to the economics of the investment, but that does not make them a new payment at exit.

Likewise, a payoff statement may already include the assumed $360,000 charge. If so, use either the all-in payoff amount or its component parts consistently. Do not subtract the charge separately after deducting a payoff total that contains it. Confirm whether accrued interest, release fees, or other items are also included.

The modeled $13.42 million is $580,000 below the original $14 million equity. That comparison excludes all prior distributions, taxes, and any other unmodeled cash flows. It is not a total return, an annualized return, or an estimate of an investor's tax loss. The article uses it only to trace sale cash correctly.

A prepayment charge can depend on its date and formula. The $360,000 above is deliberately a supplied input. It should not be treated as a fixed percentage rule for another loan. Obtain the governing terms and the appropriate payoff calculation before relying on an exit estimate.

Check Affiliate Payments and Future Financing Assumptions

Identify the legal recipient of each charge. “Financing fee” may refer to a lender, a mortgage intermediary, a sponsor affiliate, or more than one party. A reader needs the name, role, formula, and payment trigger. Similar labels do not prove that two charges cover different work or that one includes the other.

FINRA's private-placement notice calls attention to related-party transactions and material representations in covered firms' reviews. It also warns against relying only on issuer statements or accepting outside work without critical review. That context supports asking for the agreements behind a disclosed fee. It does not turn this worksheet into a finding of compliance or misconduct. FINRA Regulatory Notice 23-08.

Ask whether one payment offsets another. An assumed $90,000 mortgage brokerage fee could be separate from the $180,000 origination fee, as Rivergate's example states. A different contract could include broker compensation within the lender's fee. The right total follows the arrangement, not the number of times a label appears in the packet.

Future refinancing needs extra care in a DST discussion. IRS Revenue Ruling 2004-86 describes a particular trust whose trustee cannot renegotiate its acquisition debt under the stated facts. Its conditional tax analysis is not permission for every DST to refinance freely. A model that assumes a new loan needs a separate review of the structure, documents, and tax consequences. IRS Revenue Ruling 2004-86.

A line for future financing costs does not establish authority to incur them. Nor does a possible conversion or other structural action make a refinancing certain. Keep the permitted action, economic scenario, and tax conclusion separate. If the documents do not support an assumed funding route, label that route unresolved rather than using it to close a forecast gap.

Ask for the Records That Connect the Numbers

A useful file starts with the offering's sources-and-uses schedule and the disclosed fee terms. Add the loan commitment or note, relevant closing detail, reserve rules, and any separate rate-protection contract. For a completed closing, compare estimates with actual amounts and explain material changes. Keep each record's date visible.

Build one row for each cost or cash allocation. Record its recipient, base, rate or fixed amount, payment date, funding source, and inclusion in other totals. A final column should say whether the number is an estimate, a signed obligation, a paid amount, or a reviewer assumption. Those labels prevent a draft budget from looking like settled history.

Then reconcile the loan. Start with face principal, show every withholding, and arrive at the cash wire. Reconcile equity and other sources to all uses. Next, connect opening reserves to later deposits, payments, and balances. Finally, keep the debt repayment schedule separate from the fee schedule.

The most useful questions are concrete. Which charge is included in the lender's package? Which balance remains restricted? Which period does prepaid interest cover? Is a payoff premium already inside the quoted payoff? A response that supplies the relevant document and calculation resolves more than a general statement that the fees are customary.

Frequently Asked Questions

Are loan origination fees part of Delaware statutory trust fees?

They can be part of an offering's disclosed borrowing costs. Check the recipient, formula, and funding source. A property-level loan charge may affect investor economics even when it does not appear as a separate debit on an individual account statement. The actual offering documents control the arrangement.

Does a lower net loan wire mean less principal is owed?

Not necessarily. The lender may withhold charges, prepaid interest, or escrows while the note still states the full principal. In the fictional example, an $18 million loan delivers a $17.2 million wire after $800,000 of specified deductions. The debt remains $18 million under the assumed terms.

Should reserves be counted as fees?

A reserve deposit is a cash allocation, not automatically a fee. Track what the account holds, who controls it, and which uses are permitted. Later payments from the account need their own classification. Do not count the original deposit and every later use as separate copies of the same cost.

Is principal repayment an expense like loan interest?

Both use cash, but they have different effects. Interest pays for borrowing over a period. Principal repayment reduces the debt balance. This article's cash models keep them separate and do not determine their accounting or tax treatment. Use the actual payment schedule to trace both amounts.

Does financing a fee make it free to investors?

No. The cost still needs funding. More borrowing can increase the amount owed and future interest, while a larger equity raise changes the capital investors supply. A model should show the fee, the added funding, and the resulting debt or equity. The lender and offering documents must permit the chosen structure.

Should closing loan fees be deducted again from sale proceeds?

Only if a new payment is actually due. A cost already paid at closing should not be subtracted again as a sale cash use. It remains part of the original investment economics. Separate new exit charges, remaining principal, accrued amounts, and already-paid costs before estimating the cash available at sale.

Can I compare financing fees using a single percentage?

A common denominator can help, but it cannot answer every financing question. The same subtotal looks different as a percentage of loan principal, equity, or purchase price. Keep the contractual fee base visible. Also compare the loan's usable proceeds, payment schedule, restrictions, and exit terms before drawing a broader conclusion.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. This article helps readers connect disclosed borrowing costs, cash movements, and the records needed to understand an offering's economics.

Sources

Sources inspected October 16, 2026. Rivergate and every dollar amount, fee rate, debt term, and cash scenario are fictional teaching assumptions. No current offering, fee benchmark, investment return, or tax outcome is represented.