Due Diligence: “a systematic way to analyze and mitigate risk from a business or investment decision.” – Investopedia

You hear the phrase all the time, and it likely evokes an impression of the intelligent, analytical and necessary work required to ensure that a given investment decision is the right one for you. No truer words could be found to describe the vital process of evaluating a Delaware Statutory Trust (DST) offering, particularly in a hot market. Here is why.

Quality is Everything. Especially in a Hot Market

When considering a DST, quality is and always has been the most critical factor in evaluating the sponsor’s ability to deliver on its projected investment returns. That means it is important to know the quality of the sponsor, the property, and the legal/structural elements of the DST for you to make an informed decision on your investment.

And when market conditions make it challenging for sponsors to find suitable properties without paying a premium or when offerings are selling out so fast that many investors are left on the sidelines, the due diligence process can suffer. These market conditions are occurring in many areas of the country today, so you need to be extra cautious when evaluating a DST offering. The process of assessing every aspect of a DST offering, however, can be daunting for many investors.

Fortunately, our investment team at Fortitude Investment Group has supported our clients for over twenty years with a steadfast commitment to conducting what we believe is the most thorough due diligence on DST offerings of any firm in the country. We recognize that a DST investment is an integral part of your overall financial plan. We intend to help ensure you can assess and invest in a DST that professionals have thoroughly vetted. The Fortitude due diligence process evaluates three essential areas of each offering:

Sponsor 

We start by identifying sponsors who have extensive experience managing investment programs over several real estate market cycles and have successfully delivered on their financial projections. We evaluate:

Sponsor history & track record

  • Executive team experience
  • Local market knowledge
  • Fees and Mark-ups

Once we have determined that the sponsor meets our requirements, we begin evaluating the investment opportunity, which includes the deal structure and the property.

Deal Structure

As with any investment opportunity, there are documents to be evaluated and understood before you should invest. With DST offerings, the Private Placement Memorandum (PPM) is produced by the real estate sponsor and is considered the most comprehensive representation of the offering. It includes a detailed property description, an overview of the sponsor and management team, the financial details and projections of the investment, and the specifics of the DST structure. The PPM also includes third-party analysis reports, information on all pertinent leases, loan documents (if applicable), and other agreements and contracts.

As with the sponsor review, the process of understanding all the documents associated with a DST offering can be confusing for many investors, and it may be challenging to identify and understand the most critical aspects to consider. Again, this is where Fortitude can help you because we will already have reviewed the most important parts of the offering, which have determined through years of experience to be the areas most likely to determine if the investment will deliver on its financial projections.

After a thorough evaluation of the deal structure, we then evaluate the property. This may seem counterintuitive since most investors are interested in the property first. Some professional advisors may focus on the property more than the sponsor or the deal structure. We believe that no matter how compelling an investment property may appear, if the sponsor and structure of offering do not pass our quality test, we walk away.

Property

Our property review includes a deep analysis of the individual properties within the offering. Certain DSTs may consist of only one property, while others may include multiple properties and different asset types. That is why it is vital to evaluate every property on its merit with an understanding of the local market environment and the general strength of the asset class. We look closely at:

  • Location
  • Number of Buildings in Portfolio
  • Percent (%) occupancy
  • Cost per square foot
  • Length of Lease Terms
  • The creditworthiness of Tenant(s)

Putting it All Together

As a final step in our due diligence process, once we have evaluated the sponsor, deal structure, and property or properties in a DST offering, we ask additional questions of the sponsor to confirm and validate our assumptions that this is an offering we are comfortable presenting to clients. These further inquiries help us assess:

  • Is the fee structure competitive?
  • Is the net operating income sufficient and sustainable?
  • Are there any conflicts of interest?
  • Are there any potential engineering issues not previously stated?
  • Is the exit strategy well defined and executable?

There are risks associated with any investment, and a DST has its own risks and limitations that you should carefully consider before investing. We encourage you to work closely with an experienced financial professional like one of our team members at Fortitude Investment Group, your tax consultant, and an experienced Qualified Intermediary when considering a DST offering.

As you can, conducting proper due diligence on a DST is necessary and can be time-consuming. However, with a proper understanding of the investment options available, we believe the DST structure offers one of the most effective wealth-building strategies available to investors today.

We hope this overview has been helpful. Please do not hesitate to contact us today if you have any questions.

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This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.

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