The 3 Things to Look for in a DST Sponsor

Wallace:
What are the important things you’re looking at when looking at a sponsor versus an offering?

Brandon:
Well, I would say sponsored due diligence is really critical and it’s … Unfortunately it’s often overlooked or there’s not as much emphasis placed on it. I would rather do a mediocre deal with a good manager than what I think might be a great deal with a bad manager. As we discussed, the DST investment is passive. The sponsor is going to make all the investment decisions related to the program and you can’t audit every single number. You can’t confirm every single representation that the sponsor is making so you have to be strategic in how you look at a sponsor in order to establish the necessary comfort level and I would say that there are three key items to focus on and probably a few other things that I can mention as well when doing due diligence on a sponsor.

Brandon:
So first, one thing we do is we perform extensive background checks on sponsor executives and affiliated entities. This includes not only criminal, but also civil and regulatory records. We’re really looking for is there a pattern of regulatory or litigious behavior on the part of key principles that could be a red flag or is there some bad actor disqualification event on their record.

Brandon:
Next, you’re really not going to be as much of an expert on the property or strategy as the sponsor is, or at least you shouldn’t be, so you don’t know how things are going to turn out for an investment program in the future, but what you can do is analyze whether the sponsor has done what they said that they were going to do for past investment programs.

Wallace:
Really track record.

Brandon:
Yeah, exactly. So we call it assessing prior performance. Did they achieve their targeted returns?

Wallace:
Okay.

Brandon:
Just as important, did they actually take the steps that they said that they were going to take to accomplish those returns or did they drift from their stated strategy, and maybe take some unwarranted risks that may or may not have worked out in the long run.

Wallace:
Okay.

Brandon:
You know, what’s their experience in different market cycles, and I think a really underrated consideration is what did they learn and what did they do to help investors when things didn’t go right.

Wallace:
Okay.

Brandon:
You can really tell a lot about the integrity of a sponsor and its people by really drilling down on that one.

Brandon:
And then the third thing I’ll mention is that you want to understand how well capitalized and profitable a sponsor is. You know, there’s a fine line here because the lion’s share of returns of a DST property should go to you as the investor because you’re taking the risk, but you also want the sponsor to make money and that’s because DSTs are commonly five to ten year investments, and you want the sponsor to continue to be around to manage the property and the trust.

Wallace:
Right.

Brandon:
You know, not all sponsors in our space have been doing this for a long time. Now, most of those sponsors have been a real estate investment shop for a long time and that’s something to look at, but thankfully I think most sponsors have the financial wherewithal to continue to service their investors.

Wallace:
Well, I know we routinely will, when we’re educating people about the DST marketplace, we talk about the 40 or 50 sponsors typically that are out there at this time and there are a handful of them I’d rather not work with, but there are about 10 or 12 that I’m thrilled to work with. They’ve got that pedigree, they’ve got that track record, they’ve done what they said they were going to do, and they’ve been around long enough to … I’ve heard it said you don’t want to follow a general up the hill if he’s never been in a battle before, right? So these guys they’ve been tried, they’ve been tested. How did everybody do during COVID? I mean, that was a real interesting experience there and some of the companies were phenomenally responsive and conservative, maybe even too much so, right out of the gates. Some of them didn’t didn’t react quickly enough. So seeing as how they have responded, there’s about 10 or 12 I’m really comfortable dealing with, and I’m sure there are a lot of great folks out there make up the rest, but like you said, a lot of them that just haven’t been doing it long enough.

Brandon:
And COVID is kind of an interesting case study because you really got to see, and you probably saw this from your perspective, Wally, which sponsors were really good at communicating transparently with the investors and advisors and which ones weren’t. That’s a really big thing.

Wallace:
Yeah. I think I’ll put a bullet point next to that. The communication. I heard it said one time that something like 83% or 87% of investors don’t leave because of performance. They leave an advisor because of lack of communication. It’s kind of … That’s pretty believable, really.