I sell DST investments for a living. When an investor completes a 1031 exchange into a Delaware Statutory Trust through our firm, I earn a commission. So understand what it means when I tell you this: most investors who buy a DST have no real idea what they paid for it.

That is not because anyone hid the numbers. Every fee is disclosed in the private placement memorandum — usually somewhere between page 40 and page 90, in language written by securities lawyers for other securities lawyers. The disclosure is legal. It just isn’t legible. This article is my attempt to make it legible.

The Load: What Comes Out Before Your Money Goes to Work

When you invest $1,000,000 of exchange proceeds into a typical DST, a meaningful portion of that money never touches the real estate. It pays for the offering itself. The components vary by sponsor and program, but the structure is broadly consistent:

  • Selling commissions — paid to the broker-dealer and the advisor (yes, me). Commonly in the range of 5% to 7% of the equity raised.
  • Dealer-manager fee — paid to the managing broker-dealer that wholesales the offering, often 1% to 3%.
  • Organization and offering expenses — legal, accounting, marketing, and structuring costs, often 1% to 2%.
  • Sponsor acquisition fees and markups — many sponsors buy the property, then place it into the trust at a higher price, or charge an acquisition fee of 1% to 3% on top. This one is the easiest to miss, because it hides in the difference between what the sponsor paid and what you paid.
  • Financing and closing fees — loan origination, rate caps, lender reserves, and closing costs.

Add it up and the total load on many retail DST offerings runs roughly 8% to 15% of your equity. On that $1,000,000 investment, somewhere between $80,000 and $150,000 is gone on day one. Your real estate would need to appreciate that much just to get you back to even.

The Fees That Keep Going

The load is the entry price. There are ongoing costs too: asset management fees to the sponsor (often around 1% per year), property management fees, and frequently a disposition fee of 1% to 3% when the property eventually sells. Some programs also include a sponsor profit participation on the back end. None of this makes a DST a bad investment. It does mean the advertised distribution rate is what is left after a long line of people have been paid — and you should know who is in that line.

So Why Would Anyone Buy One?

Here is the honest other side, because the fee math alone is not the whole story. Compare the load to your alternative:

  • If selling your property without an exchange would trigger $250,000 in combined federal capital gains, depreciation recapture, and California taxes, a 10% load on the equity you preserve can still leave you far ahead of writing that check to the IRS and the Franchise Tax Board.
  • For an investor who is done with tenants, toilets, and trash — truly done, for reasons of age, health, or distance — the DST trades fee load for a professionally managed, passive position that still qualifies for 1031 treatment and the step-up in basis at death.
  • For estate planning, fractional DST interests can be divided cleanly among heirs in a way a single apartment building cannot.

The DST is a legitimate tool. It is the default use of the tool that does damage: investors who could have kept a good property, with a low Proposition 13 tax base and a cheap fixed-rate loan, paying a double-digit load to exchange into a portfolio of properties they have never seen, purchased at the top of the market because the 45-day identification clock left them no time to think.

Five Questions to Ask Before You Sign

  1. What is the total load — every fee, commission, and markup — expressed as a percentage of my equity? Ask for it as one number. If your advisor cannot or will not produce it, that is your answer.
  2. What did the sponsor pay for this property, and what is the trust paying? The difference is a cost to you.
  3. How did this sponsor’s programs from 2006–2008 and 2021–2022 actually perform — full-cycle, not projected?
  4. Is the distribution fully covered by property cash flow, or is any portion being paid from reserves?
  5. What is the realistic exit — sale, refinance, or a 721 UPREIT roll-up — and what does each mean for my ability to do another 1031?

Our Honest Position

I earn my living from the very commissions described above. That is exactly why I wrote this. When the fees are justified by your situation, I will tell you so, and show you the math. When they are not — when the right answer is to keep your property, or to exchange into something you own directly — I will tell you that too. I would rather lose a commission than watch you trade a great asset for an expensive one.

 

Direct Property vs. DST: Comparing the True Costs

Cost Factor Direct Property Purchase Delaware Statutory Trust (DST)
Upfront Fees Closing costs, legal fees, lender fees Selling commission, dealer-manager fee, sponsor acquisition fee, offering expenses, financing costs
Typical Initial Cost Usually 2–6% Often 8–15% of invested equity
Ongoing Management Self-managed or third-party property manager Professional sponsor and property management included
Annual Asset Management Fee Optional Typically around 1% annually
Property Management Owner hires manager separately Included within DST structure
Exit Costs Standard brokerage and closing costs Possible sponsor disposition fee (1–3%) plus selling expenses
Investor Control Full ownership and decision-making Passive ownership with no operational control
Best Fit Active investors wanting control Investors seeking passive income and simplified ownership

 

Frequently Asked Questions

How much does a 1031 exchange typically cost?

The Qualified Intermediary typically charges several hundred to several thousand dollars depending on transaction complexity. If purchasing a Delaware Statutory Trust (DST), investors should also evaluate sponsor fees, commissions, and ongoing management costs.

How much do DST investments typically cost?

Many retail DST offerings include total upfront costs ranging from approximately 8% to 15% of invested equity, although fees vary by sponsor, property, financing structure, and offering.

Are DST fees paid separately?

Generally, no. Most fees are built into the offering price and disclosed within the Private Placement Memorandum (PPM), which is why many investors do not immediately recognize their total cost.

Are higher DST fees always a bad investment?

Not necessarily. For many investors, the tax deferral provided by a 1031 exchange, passive ownership, estate planning benefits, and access to institutional-quality real estate can outweigh the upfront costs.

 

What is the Private Placement Memorandum (PPM)?

The PPM is the legal disclosure document for a DST offering. It contains fee schedules, investment risks, sponsor information, financing details, and the complete business plan investors should review before investing.

Can I avoid DST fees by purchasing replacement property directly?

Yes. Purchasing investment property directly typically avoids sponsor and securities-related fees but places responsibility for property management, leasing, maintenance, financing, and future disposition on the owner.

Is the lowest-fee DST always the best investment?

No. Investors should evaluate sponsor experience, property quality, financing terms, historical full-cycle performance, projected cash flow, and overall investment strategy—not simply the fee percentage.

 

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Securities offered through McDermott Investment Services, LLC, a Registered Broker Dealer, Member FINRA, SIPC, MSRB. McDermott Investment Services, LLC does not provide legal or tax advice, and purchasers should contact their attorneys and/or accountants for situations that may have legal and/or tax implications. The material contained herein neither constitutes an offer to sell nor an offer to buy real estate or securities. Such offers are made only by the sponsor’s private placement memorandum, which is always controlling. There are natural risks associated with the ownership of real estate, including acquiring interests as replacement property in a 1031 exchange, which are for accredited investors only.

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