Research guide

Problems With Delaware Statutory Trust: What a Major Tenant's Departure Can Change

By Sequoia ResearchPublished Read as Markdown

What Is This Article About?

This article follows the effects of a major tenant leaving a property owned through a Delaware statutory trust, or DST. It separates physical vacancy from unpaid rent and the end of a lease. A worked example traces rent losses, replacement costs, investor payments, and reserves through the same year. It also identifies the lease records and operating facts needed to judge whether a replacement plan can work.

Table of Contents

Define What the Tenant Has Actually Done

A notice that a tenant is leaving is a starting point. It is not a complete description of the financial problem. The tenant may have stopped using the space while continuing to pay. It may have reached the scheduled end of its lease. It may have stopped paying before the lease ends. Each case calls for a different cash forecast and a different set of questions.

Record the physical move-out date, the last payment received, and the stated lease end. Keep those dates separate. A photo of an empty building can help establish that the space is unused. It cannot establish whether the tenant still owes rent, whether a payment is in transit, or whether a release has been signed.

Likewise, a signed lease does not prove that every amount due has been collected. Match the contract to the rent ledger and actual receipts. A ledger is a record of amounts charged, received, and still owed. Ask for the basis of any adjustment that removes an unpaid amount. A waived claim, a corrected bill, and a collected payment can reduce a balance for different reasons.

This article uses an original fictional property called Alder Span. Its DST, tenants, agreements, budgets, dates, and outcomes are all invented. The cash model assumes that the relevant parties may carry out the stated work and replacement plan. It does not establish that a real DST has those powers or that any action meets tax, loan, or lease requirements.

For the main case, one tenant leaves at the end of June and pays no rent after that date. Assume its payment obligation also ends then. There is no overdue rent, deposit recovery, termination payment, or guarantee payment in this main model. Those assumptions make the operating effect clear. They should never be substituted for the facts of an actual departure.

The first research conclusion should therefore be specific: which event is confirmed, what money has stopped arriving, and what remains uncertain? “Major tenant left” is too broad to answer those questions by itself.

Measure DST Tenant Concentration With the Right Denominator

Tenant concentration describes how much of a property depends on a tenant. The answer changes with the measure. Space, scheduled rent, collected rent, and the number of leases are different measures. State which one you use before comparing percentages.

Before the departure, fictional Alder Span has four tenants and 100,000 square feet of occupied space. All listed annual rent is assumed to be collected in full. The table excludes reimbursements and other income; there are none in this model.

Tenant Occupied square feet Annual rent Share of annual rent
Departing tenant A 40,000 $600,000 33.33%
Tenant B 30,000 $720,000 40.00%
Tenant C 20,000 $360,000 20.00%
Tenant D 10,000 $120,000 6.67%
Total 100,000 $1,800,000 100.00%

Tenant A uses 40% of the space but supplies about one-third of the annual rent. It represents one of four tenants, or 25% by count. None of these figures replaces the others. A statement that the property “lost 40%” needs to name what was lost and for which period.

Tenant B has less space than A but pays more rent. That makes B the largest tenant by scheduled rent in this table. A departure review based only on square footage would miss this distinction. It could also understate the need to examine the remaining tenant that supplies the most cash.

After A leaves, occupied space falls to 60,000 square feet, or 60% of the building, assuming the other tenants remain. That does not mean the current year's rent falls by 40%. A paid for the first six months. Its effect on that year's cash must follow the actual dates.

Check the identity behind each row. Several leases may belong to one legal tenant. Several brands may share a guarantor, while similar names may belong to unrelated firms. Preserve separate lease records, then explain any grouping. Do not count a parent company's resources as support unless the actual agreement provides that support and its scope has been reviewed.

At portfolio level, use the amount exposed to the tenant within each holding. Owning interests in several DSTs does not automatically remove a shared tenant dependency. Nor does a common tenant name prove that all properties face the same lease terms or payment risk. The contract and cash sources still matter.

Read the Lease and Payment Record Together

Start with the executed lease and all amendments relevant to the departure. Identify the legal parties, premises, term, rent schedule, notice terms, and any rights to end the lease early. A summary can point to the issue. It should not replace a clause that changes the financial result.

FINRA's May 2023 private-placement notice describes reasonable investigation by covered member firms. Its discussion includes reviewing primary documents to assess material claims about contracts. That supports asking for the underlying lease when a key claim depends on it. It does not make this article's checklist a legal standard for every investor. FINRA Regulatory Notice 23-08.

Place the current rent ledger beside the lease. Record amounts due by period, payments applied to those amounts, and any credits. Check whether a payment relates to current rent, an older balance, or a separate obligation. Without that detail, a large receipt can make a weak month look stronger than its recurring collections.

Then read the departure documents. A notice of intent to leave is different from an agreed surrender. An agreed surrender may contain conditions that must be met before a release takes effect. Counsel should assess the actual rights. The research file should preserve the document and conditions without declaring that a claim has ended merely because the space is empty.

Ask for the latest operating update and its cutoff. A report issued in October may describe collections only through August. If management says September rent arrived, request the relevant evidence or mark it as an unverified update. Keep the issue date, covered period, and later receipt date distinct.

Use a short evidence map. The lease supports amounts due and contractual dates. The ledger shows how charges and receipts were recorded. Bank or payment records support cash receipt. A property inspection supports physical conditions. Each source answers a different part of the problem; one does not establish every other part.

Where records conflict, write the conflict as a question. For example, the lease may show a December end date while a notice says the tenant's obligations ended in June. The missing item may be an amendment or a release. Do not choose the more favorable date to finish the model. Show both cash cases until the difference is resolved.

Build the Cash Budget Before the Departure

A departure model needs a clear starting budget. Begin with cash actually expected to arrive, then list the expenses that cash must cover. Keep operating costs, debt payments, trust expenses, reserve additions, and investor payments separate.

Alder Span's invented starting plan has $10 million of investor equity and a $9 million loan. The loan is interest-only at an assumed fixed 6% annual rate. This gives $540,000 of annual interest, or $45,000 in each equal monthly budget period. There is no principal payment during this modeled year. This is a simplified cash budget, not a calculation under a real loan's day-count terms.

Monthly starting budget Amount
Rent collected $150,000
Property operating costs ($60,000)
Loan interest ($45,000)
Separate trust costs ($5,000)
Cash before reserves and investor payments $40,000
Addition to reserves ($10,000)
Investor payment $30,000

Property costs include all assumed property management charges. Trust costs are separate and do not repeat those charges. All costs shown are paid in the period. There are no unpaid bills or collection delays in this starting case.

If the plan holds for 12 months, rent is $1.8 million and investor payments total $360,000. That payment is 3.6% of the $10 million investor equity. It is a simple cash-payment rate, not a total return or promise about the value of the interests.

Opening reserves are $500,000. Twelve contributions of $10,000 would raise the year-end balance to $620,000 if there are no withdrawals. Those contributions are retained cash, not an added property expense. The budget shows their effect on payments without treating the same dollars as both spent and still held.

The OCC's commercial real estate lending handbook explains why income, expenses, vacancy, lease terms, and capital costs must be understood together. It also distinguishes underwriting measures from definitions used in actual loan covenants. That is bank supervisory guidance, not an approval test for this DST. Here, each definition is stated in the example. OCC handbook, printed page 42.

Trace the First Year of Lost Rent

Now apply tenant A's departure to the same budget. The first six months follow the starting plan. From July through December, A pays nothing and the other tenants continue paying $100,000 per month in total. Assume the building stays partly vacant through year-end.

Property operating costs fall from $60,000 to $55,000 per month after A leaves. This is an invented $5,000 saving, supported only by the model's assumption. It is not a rule that expenses fall with occupied area. Interest and separate trust costs remain $45,000 and $5,000 per month.

Monthly cash after these costs is now negative $5,000: $100,000 minus $55,000, minus $45,000, minus $5,000. Investor payments stop for those six months, and no new reserve contribution is made. The $5,000 operating shortfall is funded from the existing reserve.

The replacement plan also requires $300,000 of one-time leasing work and fees, paid in August. Assume that cost is permitted, funded from the same reserve, and separate from all monthly costs. The next section examines its components.

Period Rent cash Property costs Interest Trust costs Leasing work and fees Investor payments Reserve at period end
January–June, six months $900,000 $360,000 $270,000 $30,000 $0 $180,000 $560,000
July $100,000 $55,000 $45,000 $5,000 $0 $0 $555,000
August $100,000 $55,000 $45,000 $5,000 $300,000 $0 $250,000
September–December, four months $400,000 $220,000 $180,000 $20,000 $0 $0 $230,000

Annual rent is $1.5 million, down $300,000 from the plan. That is a 16.67% decline, even though A occupied 40% of the building. The half-year timing and A's share of rent explain the difference. Property costs decline by $30,000, from $720,000 to $690,000.

Investor payments total $180,000, half the original $360,000 plan. Reserves end at $230,000. These effects are linked: stopping payments reduces the cash drain, but it does not pay the leasing bill or eliminate the operating shortfall.

Check the entire year. Opening reserves of $500,000 plus rent of $1.5 million provide $2 million. Uses are $690,000 of property costs, $540,000 of interest, $60,000 of trust costs, $300,000 of leasing costs, and $180,000 of investor payments. The remaining $230,000 reconciles the cash record. No new financing or outside support is assumed.

Separate Re-Leasing Costs From Operating Expenses

A tenant replacement often has costs beyond the monthly expense budget. The research task is to identify their scope and timing, not apply an unexplained percentage to rent. Ask what work is needed, who pays, and whether the forecast includes it already.

In Alder Span's invented $300,000 budget, $240,000 pays for space improvements and $60,000 pays a leasing fee. Both are paid in August under the assumed terms. These amounts are original examples, not market quotes or customary rates. They are included once in the annual cash bridge.

An improvement allowance is an amount assigned to work for the tenant. Review whether it is a fixed cap, a reimbursement, or a landlord obligation to deliver completed space. A $240,000 cap does not prove the work can be finished for that amount. An early estimate is different from an agreed scope and price.

Read the fee's payment event too. A commission may be described by its rate, but the cash schedule depends on the selected contract. Ask whether payment is due at signing, possession, rent commencement, or another event. Do not use a guessed payment date just because a percentage is known.

The OCC handbook's office-property discussion treats improvements and leasing commissions as relevant to cash analysis even when they are outside a selected net operating income measure. Its discussion is not a current fee quote for Alder Span. Our model uses the specific invented amounts above. OCC handbook, printed pages 119–120.

Also check for work that belongs to the property owner regardless of the new tenant. A roof replacement already included in a capital plan should not be counted again as an added tenant cost. Conversely, an extra electrical upgrade required only by the new use should not disappear inside a broad maintenance label.

Keep a record of estimates, contracts, change orders, and paid amounts. Each change should identify what it replaces. If a revised $260,000 work price supersedes the $240,000 estimate, the increase is $20,000. Adding both figures would charge the same work twice. The revised total with the unchanged $60,000 fee would be $320,000.

Check Reserve Availability Month by Month

A reserve can be sufficient in total and still be unavailable for a particular use. Identify the account owner, its purpose, any minimum balance, and who must approve a withdrawal. The ledger shows cash. The documents show which uses are allowed.

In the main Alder Span case, assume the same reserve may pay the operating gap and leasing costs. Also assume $100,000 must remain untouched throughout the modeled year. The year-end $230,000 balance therefore leaves $130,000 above that floor. This is a calculation under invented terms, not permission to spend the excess.

The lowest month-end balance in the main schedule is $230,000. That remains above the assumed floor. Yet the timing still matters. A larger earlier invoice or a collection delay could create a low point before the year-end test. Request a monthly schedule when spending is concentrated in one part of the year.

For a separate timing stress, suppose the August leasing bill is $470,000 instead of $300,000, with everything else unchanged. The extra $170,000 reduces August's balance from $250,000 to $80,000. It breaches the assumed $100,000 planning floor by $20,000 at that point. Year-end cash would be $60,000, or $40,000 below the floor. This does not mean the loan is in default; the floor is an invented planning restriction.

Do not cure that gap by moving the same cash between accounts. A transfer can change which account holds the funds without increasing the combined balance. Nor should an unused credit line or hoped-for sponsor payment be counted as available cash until its actual terms, access, and timing are established.

A payment reduction can preserve cash, but its effect depends on timing. In the main case, second-half payments are already zero. Cutting them again cannot create more cash. A model that lists “suspend distributions” as a new solution must check whether the forecast already includes that suspension.

At the investor level, someone who owns 3% of the $10 million equity has contributed $300,000 in this example. Their modeled annual payment falls from $10,800 to $5,400. This is a $5,400 household cash difference. It does not establish a $5,400 loss in the value of the investment or a personal tax result.

Test the Replacement Tenant's Payment Start Date

Finding a replacement tenant is only one step toward restoring rent. Distinguish interest in the space, a proposal, an executed lease, possession, and the first payment. A “leased” label may describe a binding contract whose rent has not started.

Use a separate alternative to Alder Span's main vacancy case. Assume a replacement takes possession October 1. Its new rent is $45,000 per month, with October and November rent-free. Cash rent starts December 1, and the December amount is collected in that month. The same $300,000 August leasing cost still applies; it is not paid a second time.

Once the new tenant takes possession, monthly property costs return to $60,000. They therefore increase by $5,000 for October, November, and December compared with the main vacancy case. The new tenant adds $45,000 of rent and $15,000 of costs during the year. The net improvement is $30,000.

Year-end reserves rise from the main case's $230,000 to $260,000. Assume no investor payments resume during the second half; all remaining cash stays in the reserve. This prevents the same December cash from being counted both as retained money and as a distribution.

December alone produces $35,000 before any reserve allocation or investor payment: $145,000 rent minus $60,000 property costs, $45,000 interest, and $5,000 trust costs. That is better than the vacant case but below the original $40,000 monthly remainder. The new tenant's rent is $5,000 below A's former $50,000.

If those replacement terms continued for a separate full 12-month period, the pre-allocation cash would total $420,000. Retaining $120,000 would leave $300,000 for investors under the assumed plan. That is $60,000 less than the original annual payment plan. It is a steady-period illustration, not the actual result of the transition year.

Now test one delay separately. Keep October possession and all costs unchanged, but postpone the first cash rent until January of the next year. Losing the modeled December $45,000 lowers year-end reserves from $260,000 to $215,000. A “one-month delay” can therefore matter even though physical occupancy has already improved.

Keep Deposits and Guarantees Out of Cash Until Supported

A deposit or guarantee can change a departure's outcome. It should enter the model according to the actual right, amount, and collection timing. The existence of a document is not the same as cash received under it.

Consider a separate recovery example unrelated to Alder Span's reserve schedule. A departing tenant owes $150,000. Assume a $40,000 deposit is lawfully available, applied to that same balance, and supported by the records. A further $20,000 is actually collected. The remaining unpaid amount is $90,000.

A guarantee may cover that balance, but it is not another $90,000 of current cash. Identify the guarantor, covered obligations, limits, conditions, and financial resources. Counsel can assess enforcement. The cash forecast should distinguish a claim, expected recovery, agreed settlement, and received payment.

Check the deposit's location in the opening accounts. If it is already included in a cash balance, applying it does not create another bank deposit. The accounting classification and liability may change. Adding the same $40,000 to cash again would overstate resources. The recovery example above tracks the unpaid claim; it does not assume a separate increase in a previously reported reserve.

The same caution applies to a termination payment. It may help fund a transition, but compare its amount with the rent and rights being given up. A one-time payment should not become recurring rent in the forecast. Keep taxes, legal costs, and any settlement conditions separate from the gross amount offered.

If support comes from a master tenant, follow both levels. A master tenant leases from the trust and may receive rent from occupants under separate leases. An occupant's departure can first affect that entity's cash, while its stated payment to the trust continues for a time. Review its actual resources and duties rather than treating the continuing payment as proof that the property-level loss has disappeared.

Look for Effects on Other Tenants and Loan Terms

A major departure can affect more than the rent in that tenant's own row. Start by reading the remaining leases. Look for provisions tied to another tenant's operations, occupancy, or use of the property. Do not assume such a clause exists merely because the building has a large tenant.

The OCC handbook's retail discussion notes that some co-tenancy clauses may allow rent reductions or termination when an anchor stops operating. Those effects depend on the actual clause. This is a property-specific question, not a rule that every departure reduces everyone else's rent. OCC handbook, printed page 121.

For an independent illustration, a different lease supplies $300,000 of annual rent. Assume a valid clause reduces that rent by 12% for a full year after a specified event. The reduction is $36,000. That is an added cash effect beyond the departed tenant's own rent. It is not part of Alder Span's main model, whose other tenants pay in full.

Read the loan's actual tests and reporting requirements too. The loan may measure income differently from an investor's operating summary. A threshold, test period, reserve rule, and consequence all need their own source. Do not infer a covenant breach from a single ratio without the governing terms.

Alder Span's starting annual rent less property costs is $1.08 million. Dividing that by $540,000 of interest gives 2.00. In the main departure year, the same defined measure is $810,000, giving 1.50. These are simple illustrative coverage ratios, not an actual covenant test.

The 1.50 ratio still does not pay the separate $60,000 trust cost or the $300,000 leasing bill. After those uses, the year needs reserve cash even before the $180,000 investor payment. A ratio above one can coexist with reserve depletion when the ratio excludes major cash uses. Always inspect what sits outside its numerator and denominator.

Identify Who May Carry Out the Leasing Plan

A sound cash plan needs a valid path to action. Identify which entity may sign a new lease, authorize improvements, settle a claim, use reserves, or request lender consent. The trust, master tenant, property manager, and sponsor may have different roles.

IRS Revenue Ruling 2004-86 analyzes a particular trust with limited powers. Its stated facts restrict lease changes except for the specified tenant bankruptcy or insolvency case. It also links tax classification to the trust's powers. That is not permission for every DST to rewrite leases after any departure. The actual structure and proposed action need qualified review. IRS Revenue Ruling 2004-86, facts and analysis.

A property manager's ability to market space does not by itself establish authority to change the trust's lease. A lender's consent also does not settle every tax or trust question. Record the separate approvals needed and the evidence that each has been obtained.

If a structural change is proposed, identify its trigger, decision-maker, costs, and consequences. Do not assume a conversion or transfer solves the problem without changing rights or tax treatment. A cash forecast can test an assumed path while leaving its legal availability unresolved.

Investors should also separate the need for cash from the ability to sell their interest. The SEC's private-placement bulletin, updated September 21, 2026, describes limited disclosure and resale difficulty, including possible indefinite holding. A tenant departure does not create an assured buyer or an investor redemption right. SEC private-placement bulletin.

Build an Evidence-Based Tenant Departure Review

A useful review connects the event to cash and action. Begin with the confirmed departure facts and the legal tenant's identity. State the affected rent, the period, and any continuing obligation. Then identify the records that support the amount actually collected.

Next, compare the latest cash budget with the prior plan. Explain changes in costs rather than applying a broad vacancy percentage. Show replacement work and fees separately, with their payment dates. Preserve the original forecast so later revisions do not erase the size of the change.

Map each funding need to a source. Existing unrestricted cash, restricted reserves, collected settlements, and conditional support are different resources. Record the lowest expected balance and the assumptions that create it. Keep a missing source visible instead of forcing the schedule to balance with unexplained “other cash.”

For the replacement plan, retain the evidence behind each milestone. A proposal supports a possible path; an executed lease supports specified duties. Possession and rent commencement still need their own dates. Test a delay and a changed cost without quietly stacking every alternative into the main case.

The final note should explain what changed, what is funded, what remains uncertain, and which document would resolve the next question. It can say that Alder Span's invented year reconciles to $230,000 of reserves. It cannot turn that arithmetic into evidence that an actual tenant can be replaced, the costs are adequate, or the investment will recover its value.

FAQ

Does a Tenant Moving Out Mean Rent Stops Immediately?

No single timing rule applies to every lease. Physical departure, payment failure, and the end of an obligation are separate events. Read the executed terms and relevant notices, then match them to actual receipts. Alder Span assumes both departure and the end of payments at June's end solely to make its example clear.

Is Tenant Concentration Best Measured by Space or Rent?

Use both, with clear definitions. Alder Span's departing tenant uses 40% of the space and supplies 33.33% of annual rent before departure. It is also 25% of the tenant count. Each number answers a different question; none establishes the probability of loss.

Why Can Investor Payments Fall More Than Property Rent?

Some costs continue after rent declines, and replacement work may need cash. In the main case, annual rent falls 16.67% while investor payments fall 50%. Reserves also decline. These are linked results under stated assumptions, not a universal relationship between vacancy and distributions.

Does a Signed Replacement Lease Restore Cash Right Away?

Check possession and payment dates, concessions, and conditions. In the alternative case, October possession leads to December rent after two free months. Costs increase before the cash arrives. The replacement improves year-end reserves by $30,000, not the full annual rent in the new lease.

Can a DST Use Every Dollar in Its Reserve to Replace a Tenant?

Do not assume that. Identify restrictions, approvals, committed uses, and any required balance. A reserve statement establishes a reported amount, not unrestricted spending authority. The model's $100,000 floor is invented and cannot be used to interpret a real trust or loan.

Does Coverage Above One Prove the Transition Is Fully Funded?

No. First read the ratio's definition. Alder Span's 1.50 illustrative ratio excludes trust costs, leasing costs, and investor payments. The full cash bridge shows reserve use despite that ratio. A real covenant may use different inputs and consequences.

Which Documents Matter Most After a Major Tenant Leaves?

The executed lease and amendments, departure agreement or notices, current rent ledger, receipt records, operating budget, replacement work scope, proposed lease terms, reserve restrictions, and loan provisions address different parts of the issue. Request the documents that support the specific claim being made. Missing evidence should remain a stated gap.

About Sequoia Research

Sequoia Research, LLC provides independent research on DSTs and other real estate investment offerings. This library explains how to evaluate sources, test assumptions, and ask useful investment questions. Its educational examples do not replace review of a particular offering and investor's circumstances.

Sources

Sources inspected October 17, 2026. All properties, tenants, terms, costs, and calculations in the worked examples are fictional. No actual tenant departure, current lease proposal, guarantee recovery, or private cash balance was verified.