Financing and Lender Issues

DSTs have greatly simplified the process for financing securitized real estate, giving investors access to very competitive interest rates because the trust will own 100% of the fee interest and is the sole borrower.  The lender only needs to approve one borrower instead of up to 35 individual borrowers, as is the case with a TIC program.

A well-structured DST that owns investment-grade real estate is attractive to institutional lenders because of the sponsor’s proven track record in property management and because DSTs are bankruptcy-remote, which means they contain special purpose entity provisions that prevent the bankruptcy creditors of the beneficiaries from reaching the DST’s property. This assures the lender that they can foreclose on their first mortgage of the real estate should the need arise.

In addition, the lender does not need to underwrite or qualify any of the investors, except for Patriot Act considerations. Because the better sponsors only sell to accredited investors, the need for the lender to monitor transfers of beneficial interests is eliminated.

Finally, because the investors have no vote in the property’s operations, there is usually no need for DST investors to sign any non-recourse loan carve-outs. As with the primary loan, the lender deals directly with the trust on the matter of carve-outs. DST investors are not personally liable for the repayment (non-recourse) of the loan, and the loan does not affect the investor’s personal credit report.