DSTs can be risky investments, so identifying risky DST 1031 investments and funding structures is critical to protecting the investor from loss of principle, loss of profit and exposure to capital gains. Delaware Statutory Trusts and other 1031 investment vehicle entity organizations are passive entities where the investor has no control over the investment and is locked into the investment for a 10-year holding period. That’s a pretty long period of time to be locked into a deal and brings up the following key risks you have to weigh:
- Term risk. Term risk is the risk the market will change over the course of the holding period to an extent where the investor is no longer likely to get what they bargained for, so seeing a working term risk management strategy is critical to the investment review process with the broker-dealer or investment adviser. If you don’t see one, then you have a risk waiting that you may not have to take as a condition of investment, so you should probably ask some hard questions.
- Maturity risk. Maturity risk is the risk the asset will not be worth enough money at the time of the planned exit to provide the full economic gain the investor or lender has been promised. Most 1031 investment vehicles today are practically “zero-coupon” deals – meaning there is no substantive return paid until exit, so everything depends on what the asset will be worth 10 years from now. Maturity risk can only be managed by carefully managing term risk exposure, so if there is no term risk management program, then you may have significant maturity risk exposure that you can do nothing to offset.
- Default risk. Default risk is risk of loss mainly due to a simple human error like not paying the property insurance, taxes, payroll taxes or similar requirement in a timely manner resulting in a foreclosure. If the property has no third-party verification management system for managing this risk, then you will have exposure.
Find out how to manage all of these risks in a proactive, real-time environment that is truly affordable by talking to an INVIZEN representative today at 832.663.9634.