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Risks 1031 Exchange DST

Risks Of 1031 Exchange DST

Although there are a lot of benefits to doing a 1031 exchange DST, there are some risk associated with a 1031 exchange DST. We will go over some of the risks of 1031 exchange DST that you may encounter when dealing with a 1031 exchange DST company or product. Keep in mind, that the benefits to a 1031 exchange DST may outweigh the risks of 1031 exchange DST. It is up to you as an investor to understand the risks of 1031 exchange DST, as well as the benefits to a 1031 exchange and make the best decision for your investing requirements. 

Some of the risks of 1031 exchange DST properties may include the fact that there are no guarantees for monthly distribution amounts, no guarantees for projected appreciation, illiquidity, loss of day-to-day management control, interest rate risk and potential loss of entire principal amount invested.The use of leverage in real estate investments may increase volatility and the overall risk of loss. Furthermore, real estate investments and DST 1031 properties entail fees related to the acquisition, syndication, ongoing management and eventual disposition of the properties. These fees could eventually impact the performance of an investment. These risks of 1031 exchange DST are typically tried to be mitigated by large management companies who hold billions of dollars or real estate, and the management of these properties. 

Limitations and Risks 1031 Exchange DST

  • Once the offering is closed, there can be no future contributions of capital to the Delaware Statutory Trust or DST by either current or new co-investors or beneficiaries.
  • The Trustee of the Delaware Statutory Trust or DST cannot renegotiate the terms of the existing loans, nor can it borrow any new funds from any other lender or party.
  • The Trustee cannot reinvest the proceeds from the sale of its real estate making this one of the risks of 1031 exchange DST
  • The Trustee is limited to making capital expenditures with respect to the property to those for (a) normal repair and maintenance, (b) minor non-structural capital improvements and (c) those required by law.
  • Any liquid cash held in the Delaware Statutory Trust or DST between distribution dates can only be invested in short-term debt obligations. All cash, other than necessary reserves, must be distributed to the coinvestors or beneficiaries on a current basis, and The Trustee cannot enter into new leases or renegotiate the current leases. This could be one of the risks of a 1031 exchange DST.

Some of these risks for 1031 exchange DST investors and potentially trigger unforeseen tax consequences to investors. Most sponsors have structured the 1031 exchange DST with master leases, allowing them the flexibility to address some of the issues that the seven deadly sins can create. Also, most 1031 exchange DST sponsors will typically use long-term financing that will potentially allow a  1031 exchange DST property to be sold prior to the need to either pay off or refinance the loan on the property. All real estate and DST properties entail fees and costs that investors should review and consider carefully with their CPAs and attorneys prior to making an investment. 1031 exchange DST fees and costs should be weighed carefully against the potential for tax deferral using a 1031 exchange DST with certain products. All 1031 exchange DST fees and costs are outlined in each offering’s Private Placement Memorandum for investors to review and agree to prior to making an investment and understand these risks.

Loan Securitization Risks 1031 Exchange DST

Some of the DST 1031 exchange properties are financed with commercial mortgagebacked security (CMBS) financing. This is financing wherein a financial institution will make a loan to a borrower and then package that loan with many other loans in a trust, which is then typically sold to institutional investors looking for income. CMBS financing can pose substantial risks to DST 1031 investors due to the unique structure of CMBS financing and special servicers typically being very aggressive against CMBS borrowers that are in any type of default of the loan provisions. Many institutional buyers of commercial real estate utilize CMBS financing due to the competitiveness of the loan terms and rates offered; however, it is important to note that if an investor is uncomfortable with CMBS financing, he or she should not invest in a DST 1031 property that will be using it. Some of the risks of 1031 exchange DST products could be mitigated by large institutions of manage their own capital and financing, as well as have their own management company. Again, the risks discussed above are not meant to be an exhaustive list of risks involved with real estate investments and DST properties. We do  encourage investors to read each offering’s Private Placement Memorandum (PPM) completely and to pay careful attention to the risk factors section.


If you would like to learn more of the risks of 1031 exchange, you can fill out the form below, call us directly - 805-583-2720 or email kyle@winthco.com to help understand some of the risks of 1031 exchange products. 

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