DST risks due to holding period

[Matyas A. S.]

I had a conversation with a friend about real estate DST investments. We invested recently into DST-s as part of 1031 exchange. I educated myself on the risks and read the PPM-s. I am comfortable and I think it was a good choice for 1031 exchange funds. But for new money to be invested the consideration is slightly different. (Deferring of taxes is a significant motivator.)

One particular risk that came up has to do with the fact that the multifamily DST-s we looked at typically have 45%-55% loan to value ratios with 10 year fixed rates. Most DST sponsors indicate that they will sell in 7-10 years. I assume the main reason for that is so that the investors could get out. Those who want continued real estate exposure can reinvest into another DST etc. The loan term seems to be engineered accordingly.

The concern that was raised is that what if there is a recession or a credit crisis and so it is hard to get loans. That would reduce the market for the properties since fewer investors can get loans. The fact that the DST has to sell is a liability in that case. It seems that the consequence is that the market would set a lower price. On the other hand if you invest into a multifamily property via say a partnership, there is no similar pressure to sell within a time period. The partners can and probably will decide to try to hold until the crisis eases and sell when they can get the proper market price.

Do you agree that the limited holding period is a concern?

The PPM-s talk about the option of turning the DST into a Springing LLC when things do not go according to plan. I assumed that such conversion would enable a refinancing of the loan (say if sale is not possible or unattractive and the loan terms are such that extension is not possible).

I know that there are many other risks. The above was something I did not consider myself until I talked to my friend.