The DST structure has greatly simplified the process for financing securitized real estate and grants the investors access to very competitive interest rates usually only available to institutions. This is because the trust will own 100% of the fee interest in the real estate and is the sole borrower. Therefore, unlike a tenancy-in-common program where there can be up to 35 individual borrowers, each of whom needs to be approved by the lender, with a DST the lender only needs to make one loan to one borrower.
A well-structured DST which owns investment-grade real estate is attractive to institutional lenders because of the proven track record of the sponsor in property management, and because DSTs are bankruptcy remote, that is, they contain special purpose entity provisions which 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.
Furthermore, the lender does not need to underwrite or qualify any of the investors. Other than Patriot Act considerations, due diligence investigations of the investors is normally not necessary. And as 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 operations of the property, 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. Standard carve-outs for environmental damages and investor fraud are executed by the DST trustee, according the DST investor an absolute non-recourse loan. The DST investor is not personally liable for the repayment (non-recourse) of the loan, and the loan does not affect the investor’s personal credit report.