A Delaware Statutory Trust can be a powerful tool for real estate investors seeking passive income, tax deferral, and institutional-grade property access. But DSTs carry a distinct set of risks that many investors only discover after they have already committed. This article breaks down every major Delaware statutory trust risk so you can evaluate whether a DST fits your investment goals before signing anything.
The 9 Key Delaware Statutory Trust Risks
1. Illiquidity
DST investments are not liquid. Once you invest, your capital is typically locked in for 5 to 10 years, and there is no open market where you can sell your beneficial interest the way you would sell a stock or an ETF.
A limited secondary market for DST interests does exist, but it is small, thinly traded, and there is no guarantee you will find a buyer at a fair price, or at all, if you need to exit early. Investors who face unexpected medical expenses, business needs, or life changes can find themselves unable to access their capital.
What to do: Only invest capital you can afford to leave untouched for the full holding period. Treat a DST commitment the same way you would treat a 5 to 10 year CD with restricted access.
2. No Investor Control
When you invest in a Delaware Statutory Trust, you become a passive beneficial owner. The DST sponsor makes every material decision about the property: when to lease, when to make improvements, when to sell, and how to respond to market conditions. You have no vote and no say.
This is not always a disadvantage. Many investors choose DSTs specifically to escape the burdens of active management. But it does mean you are entirely dependent on the quality and judgment of the sponsor. If the sponsor makes poor decisions, you bear the financial consequences.
What to do: Study the sponsor’s track record before investing. See our guide on how to choose a reputable trustee and sponsor for your DST.
3. The Seven Deadly Sins: IRS Structural Restrictions
This is one of the most important and least understood Delaware statutory trust risks. The IRS ruling that allows DSTs to qualify as like-kind property in a 1031 exchange comes with seven strict requirements, commonly called the “Seven Deadly Sins.” These are not industry jargon. They are binding legal restrictions that make DSTs structurally inflexible.
The Seven Deadly Sins of DST Investing:
- No new capital contributions. Once the offering closes, neither existing nor new beneficiaries can contribute additional capital. If the property needs major repairs or the market turns, the sponsor cannot raise new funds.
- No renegotiation of existing debt. Trustees cannot renegotiate loan terms unless the tenant is in bankruptcy or insolvency. If interest rates rise sharply, the trust is locked into its original financing regardless of how unfavorable that becomes.
- No reinvestment of sale proceeds. When the trust sells property, all proceeds must be distributed to investors. The trust cannot use sale proceeds to buy a new property or maintain reserves for reinvestment.
- No new leases or lease modifications. The trust cannot sign new leases or modify existing ones, except when a tenant is in financial distress. If a major tenant vacates, the trust has almost no flexibility to re-tenant the property on favorable terms.
- Cash must be distributed at least quarterly. All cash, less reserves, must be distributed to investors at regular intervals. The trust cannot retain earnings to weather a downturn or fund improvements.
- Capital expenditures are limited to routine maintenance. Major structural improvements, repositioning, or redevelopment are off the table. The trust can only spend money on normal repairs and non-structural improvements.
- No fractional sales. The trustee cannot sell a partial interest in the trust’s property. The entire property must be sold together.
These restrictions make DSTs significantly less adaptable than direct property ownership or other investment structures. A vacant building, a struggling tenant, or a shifting market can create serious problems that the trust has limited tools to address.
4. Sponsor Risk
Every DST rises or falls based on the competence and integrity of the sponsor. The sponsor selects the property, structures the deal, manages operations, and decides when to sell. Investors have no recourse if the sponsor underperforms, makes poor acquisitions, or encounters financial difficulties of their own.
Sponsor failures have occurred. Some have resulted in reduced distributions, extended holding periods, and losses of principal. The DST structure provides limited protection because investors cannot replace the sponsor or change direction mid-investment.
What to do: Review the sponsor’s full history of completed DST offerings, including those that did not go as planned. Ask how many offerings they have closed, what the average returns were, and whether any properties were sold at a loss. See our guide on evaluating DST investments.
5. Concentration Risk
Many DSTs own a single property or a small cluster of properties, often with one or two major tenants. When that structure works, investors enjoy stable, predictable distributions. When the primary tenant struggles or vacates, the entire DST can be impacted at once.
This is the opposite of the diversification benefit that often attracts investors to DSTs in the first place. A REIT might hold hundreds of properties, spreading risk across many markets and tenants. A DST owning one industrial building with a single tenant has far less cushion against a credit event or vacancy.
What to do: Ask specifically how many properties and tenants are in the offering, and what percentage of income comes from a single source. Diversifying across multiple DST offerings can reduce this concentration risk.
6. Fees and Their Impact on Returns
DSTs carry multiple layers of fees that reduce the net return to investors. Common fees include:
- Acquisition fee: Paid to the sponsor at closing, typically 1 to 3 percent of the purchase price.
- Asset management fee: Ongoing annual fee, typically 0.5 to 1.5 percent of asset value.
- Property management fee: Paid to the property manager, typically 3 to 5 percent of gross revenues.
- Disposition fee: Paid when the property is sold, typically 1 to 3 percent of the sale price.
- Broker-dealer commissions: If you purchase through a broker-dealer, sales commissions typically run 5 to 7 percent of your investment amount.
These fees are not hidden, but they do compound. A DST that projects a 5 percent annual cash distribution may deliver 3.5 to 4 percent to investors after all costs are accounted for. Always model the net return after all fees, not the gross projected yield.
What to do: Request the full fee disclosure document from the sponsor and calculate your net yield at multiple performance scenarios, not just the base case.
7. Market and Interest Rate Risk
DSTs are real estate investments and carry the same exposure to market cycles, rising vacancy rates, and declining property values that any real estate investment does. A recession, a shift in demand for a particular property type, or a geographic market downturn can all reduce the value of a DST’s underlying assets and compress or eliminate distributions.
Interest rate risk is particularly acute for DSTs because of the Seven Deadly Sins restriction on debt renegotiation. When a DST is originated with fixed-rate financing in a low-rate environment and rates rise sharply, the property’s value can decline even if the building itself performs well, because buyers in the open market will apply higher capitalization rates. And unlike a direct owner, the trust cannot refinance to reduce debt service.
What to do: Understand the financing structure of any DST before investing. Know the loan maturity date, the interest rate, and what happens if the property cannot be sold or refinanced at the end of the loan term.
8. Leverage and Loan Maturity Risk
Many DSTs use leverage, meaning they borrow against the property to purchase it. Leverage amplifies both returns and losses. If the property declines in value and the loan comes due, the trust may be forced to sell at an inopportune time or face default.
Loan maturity risk is real. If a DST’s loan matures and lenders are unwilling to extend or refinance, the sponsor may be forced to sell the property in a down market, potentially at a loss. Investors in this scenario can lose principal even in properties that had been performing well up to that point.
What to do: Ask for the loan-to-value ratio, the loan maturity date, and whether there is any reserve fund to handle refinancing risk. Prefer DSTs with longer-dated fixed financing when possible.
9. Tax Considerations and Depreciation Recapture
DSTs are not tax-free. Distributions are generally taxable as ordinary income in the year they are received. When the DST eventually sells its property, investors will owe capital gains taxes on any appreciation, as well as depreciation recapture at a rate of up to 25 percent.
Investors who enter a DST through a 1031 exchange continue to defer these taxes until the DST sells. At that point, another 1031 exchange can again defer the gain, but the tax basis carries forward, and the eventual tax bill can be substantial.
Additionally, DST investments are only available to accredited investors under SEC rules. This excludes many potential participants. Investors who are not yet accredited should review our page on non-accredited investor options for alternatives.
What to do: Work with your CPA before entering any DST to model your tax exposure at each stage, including the year you enter, each year you receive distributions, and the year the DST sells.
How to Mitigate Delaware Statutory Trust Risks
Understanding the risks is step one. Actively managing them is step two.
The most effective risk mitigation strategies for DST investors include:
- Sponsor due diligence. Request a track record of all prior offerings, including any that underperformed. Review audited financial statements where available. Check for regulatory actions or complaints through FINRA BrokerCheck.
- Diversify across multiple DSTs. Rather than concentrating your investment in a single DST, consider spreading capital across two or three offerings with different property types, geographic markets, and loan structures.
- Understand the hold period before you commit. Do not invest money in a DST that you may need within the hold period. Have a separate liquid reserve for emergencies.
- Read the Private Placement Memorandum. Every DST offering includes a Private Placement Memorandum (PPM) that discloses all risks, fees, and restrictions. It is long and technical, but the fee section and risk factors section are mandatory reading.
- Work with an independent advisor. A fee-only advisor with DST experience can evaluate the offering independent of any sales commission. They can help you compare offerings and identify red flags.
Are DSTs Still Worth Considering?
Despite these risks, DSTs remain a compelling option for the right investor in the right situation. They provide access to institutional-grade real estate without active management obligations, and the tax deferral available through a DST 1031 exchange can preserve a significant amount of capital that would otherwise go to the IRS.
The key is entering with clear eyes. A DST is not a passive income product that simply replaces a savings account. It is an illiquid, fee-bearing, sponsor-dependent real estate investment with structural limitations written into federal tax law.
For investors who understand those realities, have adequate liquidity elsewhere, and select a proven sponsor in a solid market, DSTs can play a meaningful role in a retirement or wealth-building strategy. For a balanced view of what they offer alongside these risks, see our article on understanding Delaware statutory trust benefits.
Frequently Asked Questions
What are the main risks of a Delaware Statutory Trust?
The main risks are illiquidity (capital is locked in for 5 to 10 years), loss of investor control (the sponsor makes all decisions), the IRS Seven Deadly Sins restrictions (which limit the trust’s flexibility), sponsor risk, concentration risk from single-property or single-tenant structures, layered fees, interest rate and market risk, and debt maturity risk. Tax exposure at sale, including depreciation recapture, is also a risk investors often underestimate.
What are the Seven Deadly Sins of a Delaware Statutory Trust?
The Seven Deadly Sins are the IRS-imposed structural restrictions that make a DST eligible as a 1031 exchange replacement property. They prohibit: (1) new capital contributions after the offering closes, (2) renegotiating loan terms, (3) reinvesting sale proceeds, (4) signing new or modified leases except in bankruptcy situations, (5) withholding cash distributions, (6) making major capital improvements, and (7) selling partial interests in the property. These restrictions make DSTs inflexible when market conditions change.
Can you lose money in a Delaware Statutory Trust?
Yes. DST investors can lose principal if the underlying property declines in value, if the loan matures and cannot be refinanced, if the primary tenant defaults, or if the sponsor makes poor decisions. The Seven Deadly Sins restrictions limit the trust’s ability to respond to these problems. Investors should not treat DSTs as guaranteed income instruments.
How long do you have to hold a DST investment?
Most DSTs have a projected holding period of 5 to 10 years, though the actual hold can be shorter or longer depending on market conditions and the sponsor’s strategy. There is no guaranteed exit date, and there is no reliable secondary market if you need to sell early.
Are DSTs suitable for non-accredited investors?
Generally, no. Most DST offerings are restricted to accredited investors under SEC Regulation D. Some structures are available to non-accredited investors, but they are less common. See our page on non-accredited investor alternatives if you do not meet the accredited investor definition.
How do fees affect DST returns?
DST fees are significant and stack at multiple levels: acquisition, management, property management, disposition, and broker-dealer commissions. In total, fees can reduce a projected 5 percent gross yield to a net yield of 3.5 to 4 percent for the investor. Always model your return on a net-of-fees basis and compare offerings by their net projected yields, not gross.
What happens when a DST sells its property?
When the DST sells, all proceeds must be distributed to investors (one of the Seven Deadly Sins). Investors then owe capital gains tax and depreciation recapture on any gain, unless they execute another 1031 exchange into a new qualifying replacement property within the required timeframe. For more on this, see our article on the DST 1031 exchange process.
What is sponsor risk in a DST?
Sponsor risk is the possibility that the DST sponsor will make poor property selections, manage assets poorly, or face financial problems of their own that affect the trust. Because investors have no control over the trust and cannot remove or replace the sponsor, the sponsor’s quality is arguably the single most important factor in a DST investment.
