When evaluating a real estate syndication or DST, the deal structure matters just as much as the property itself.
Before investing in any real estate syndication or passive real estate investment, whether it's a DST, TIC, LLC, LP, or REIT, it's critical to understand the deal structure before you fall in love with the actual property.
The way a syndication deal is constructed, including the fees, debt terms, waterfall structure, and exit mechanics, can impact your investment outcomes just as much as the performance of the underlying real estate. Whether you're using a 1031 exchange to invest in a DST or evaluating a preferred return in a syndication, understanding the fine print is essential.
"The following 20 Deal Structure Questions are designed to help you evaluate real estate syndication offerings objectively, identify risks, and ask the right questions before committing capital. Use this checklist as your framework for syndication due diligence so that every dollar you invest is informed, intentional, and aligned with your goals."
This guide focuses on deal structure and terms. For a complete investing framework, pair it with our Real Estate Due Diligence Checklist (property evaluation) and our 20 Questions to Ask a Sponsor (sponsor vetting).
What You'll Learn in This Guide
- How to evaluate offering prices against independent appraisals
- Understanding the complete fee stack (upfront, ongoing, and disposition)
- What to look for in loan terms and debt structure
- How profit-sharing and waterfall structures work
- Red flags that signal potential problems in deal structure
- DST and TIC-specific constraints you need to understand
Pricing & Upfront Fees
Questions 1–4
1What is the offering price versus an independent appraisal (and date of appraisal)?
Why It Matters
This theoretically gets you the price you pay to access the investment.
Key Takeaway
Be aware if the appraisal is based on special tax incentives, lease renewals, or other value-add items that are not yet completed. Using the appraisal price rather than the acquisition price gives you an idea of the premium you are paying to purchase the property as syndication vs. the value a single-buyer would be willing to pay. This allows you to assess whether the fees are reasonable and worth the benefit of going passive and accessing institutional real estate that you may not have access to if buying on your own.
What to Ask For
- Full appraisal that includes income/sales/cost approaches
- Ask if the appraisal is based on comps or income and make sure it is recent and relevant to today's market environment
Red Flags to Watch For
- !Old appraisal (>6 months)
- !Broker opinion of value (BOV) rather than a third-party appraisal
- !Offering price that is far above appraised value
2Show the Sources & Uses table. Where does every dollar go?
Why It Matters
Gives you a line-by-line breakdown of the cost of putting the deal together.
Key Takeaway
This approach allows you to compare what you pay for the property versus what the sponsor paid. The simple calculation is: Acquisition Price - Offering Price = cost/fees to investors. Don't get too caught up with 'who gets what.' Syndication costs are one of many factors that determine whether an investment will perform well. Investors can be put off if they feel a party is making too much money on a deal. Instead, base your investment decision on whether the price you pay for the investment is worth it compared to the next best investment you are considering.
What to Ask For
- One-page sources/uses with line items (purchase price, closing costs, reserves, fees, cap costs)
Red Flags to Watch For
- !Big Miscellaneous fees
- !Missing reserves
- !High upfront fees masked as 'transaction costs'
3What is the total fee stack (up-front, ongoing, and disposition)?
Why It Matters
Higher fees translates to lower yield.
Key Takeaway
Sponsors may lower their upfront fees to make the deal look attractive. However, they will sometimes pay themselves by adding miscellaneous transaction fees or collecting the fees upon sale. Finance fees, transaction fees, other random admin fees can end up significantly eating returns so be aware.
What to Ask For
- Summary of every fee (acquisition, organization, placement, financing, asset management, property management, construction, refinancing, disposition, promote) with basis and timing
Red Flags to Watch For
- !Double-dipping (same activity, multiple fees)
- !Fee bases tied to gross asset value instead of equity or results
4Acquisition fee specifics: rate, base, and whether it's reflected in the price?
Why It Matters
Don't overpay for a property!
Key Takeaway
Sponsors typically make most of their money on the front-end. Make sure their incentives are aligned with investors for a profitable exit and that the price of the property is reasonable after the up-front acquisition fee.
What to Ask For
- Fee percentage and whether it's charged on the purchase price or just the equity
- Whether the fee is included in the offering price
- Who gets the fee and what is their incentive
Red Flags to Watch For
- !High % on gross purchase price
- !A fee that is also booked in sources/uses (paying twice)
Free Download
Get the Complete Deal Evaluation Guide
Download all 20 questions as a PDF checklist. Use it during your next investment evaluation or sponsor call.
Ongoing Fees & Profit Sharing
Questions 5–8
5How is the asset management fee calculated?
Why It Matters
The asset management fee is charged on an ongoing basis and usually comes directly out of cash flow.
Key Takeaway
Sponsor's charge for managing your asset and the fee reduces your cash flow. Make sure it falls within a reasonable range and does not have any surprise escalators.
What to Ask For
- The fee percentage and whether that is assessed on effective gross income (EGI), net operating income (NOI), or equity in the deal
- When the fee is charged and where it is paid from
- Whether the fee escalates at any point
Red Flags to Watch For
- !Fee on gross asset value
- !Automatic escalators not tied to performance
- !Greater than 0.5-2% is considered expensive
6Who gets the property management fee? Is it an arms-length PM? Is it market-rate?
Why It Matters
PM fees reduce cash flow and can be paid to the sponsor rather than a third-party.
Key Takeaway
Make sure the PM fee on the deal you are considering falls within the typical market-rate: Residential runs from 1-3% of rental income, NNN properties have lower fees sometimes 0 - 0.5%. Property managers can be third-party or an affiliate of the sponsor. If your PM is affiliated, investigate whether they are paid market rate and can be terminated if they are underperforming.
What to Ask For
- PM Fee percentage
- Which expenses are born by the PM and which are passed through
- If investors/sponsor has termination rights if the asset is being mismanaged
- Proof that the fee is market rate
- If the PM is third-party (arms-length) or a related-party of the sponsor
Red Flags to Watch For
- !Related-party PM company with above-market fees and no right to terminate if mismanaged
- !High management fee on NNN properties. You don't need much management on a property where there is little landlord responsibility
7How does the disposition fee and promote work at sale?
Why It Matters
Exit costs affect the profitability of a sale. Make sure you understand how they work as you assess the risk vs. reward of a potential investment.
Key Takeaway
Disposition fees and promote (profit-sharing) are not all bad. They incentivize the sponsor to responsibly manage an asset and find the most profitable exit. DSTs will often take high disposition fees since they are not allowed to charge a promote. Make sure they are reasonable and find out if they are charged after investors make a profit or if they can be charged even if a property is sold for a loss. It may be smart to ask to see a closing statement of a previous sold properties to get an idea of what the fees look like. Sponsors sometimes find ways to take fees through various miscellaneous transactions/admin costs.
What to Ask For
- Disposition fee % and whether it is charged on equity or gross value
- Promote waterfall at sale
- Whether the disposition fee is paid before or after investor return hurdles
Red Flags to Watch For
- !Disposition fee paid regardless of whether the sale is profitable
- !Promote triggered on appraised (not realized) value
8How does profit-sharing between the sponsor and investors work? (also called waterfall, pref, catch-up, and split)
Why It Matters
Profit-sharing is different on every deal. Make sure you know what percentage of the profit will go to investors and any hurdles in place.
Key Takeaway
Preferred returns and waterfalls in partnerships can be complicated. Don't take an advertised IRR at face value. Ask for a hypothetical example written out with several different potential outcomes. Some deals will have a higher waterfall fee if they have lower upfront fees so keep the big picture in mind when comparing deals.
What to Ask For
- Preferred return rate (cumulative or simple)
- Catch-up terms
- Split tiers (e.g., 70/30 -> 60/40)
- Compounding rules
- Order of who gets paid first, sponsor or investors
Red Flags to Watch For
- !Catch-up that pays the sponsor before investors
- !Unclear profit splits or tiers
- !Low preferred return and a profit share that pays the sponsor more than investors
Understanding Fees is Only Half the Battle
You're making progress. Download the complete guide to learn about debt structure, governance, and exit mechanics.
Returns & Debt Structure
Questions 9–13
9How is your projected return calculated?
Why It Matters
Projected returns can use cherry-picked numbers to make a deal look more exciting.
Key Takeaway
Don't take every projected IRR as a guarantee. Ask how that number is calculated. Make the sponsor show you the math using hypothetical examples. Keep asking until you totally understand how they came up with their assumptions.
What to Ask For
- IRR (internal rate of return) or equity multiple
- Whether fees, reserves, and financing costs are included in the calculation
- Exact timing of cash flows
- Example calculations
Red Flags to Watch For
- !IRR shown before fees
- !Including future assumptions as if guaranteed
- !Ignoring the need for ongoing capital reserve contributions or underestimating expenses
10What are the terms of the Loan? fixed/floating, covenants, prepay limits.
Why It Matters
Loan structure can make or break a deal.
Key Takeaway
Loan documents are very long and nuanced. They often require a lawyer to fully understand. Very few investors have the resources to review these documents. Therefore, you need to review each Private Placement Memorandum (PPM) to find the details of terms of the loan in writing. Risks go far beyond the interest rate published on marketing pieces.
What to Ask For
- Rate - is it fixed or floating?
- Term - is there a balloon payment due?
- Amortization schedule
- DSCR/LTV covenants
- Lockout/defeasance/yield maintenance (penalties for paying off the loan early)
- Cash flow sweeps
- Cross-collateralization (one loan for an entire portfolio)
Red Flags to Watch For
- !Fully floating debt without a cap
- !Short maturity with a lockout
- !Cross-collateralization across other, lower-quality assets
11Does the loan have an interest rate cap? (if floating)
Why It Matters
If you have floating rate debt, a rate cap is like insurance.
Key Takeaway
Fixed rate loans often come with large prepayment penalties so floating interest rate debt can be necessary for shorter term investments. However, floating rate debt introduces more risk. Use this guide to find out where the risk lies and make sure to ask yourself whether the increase in risk makes sense for your financial goals.
What to Ask For
- Cap agreement, counterparty, cost, strike vs. current index
- Who funds extensions
- How long are extensions
Red Flags to Watch For
- !'We'll get a cap later'
- !Short cap term with a long loan term
- !No budget for extension
12How are capital reserves funded?
Why It Matters
A robust capital reserves budget protects your distributions and value.
Key Takeaway
Make sure your property has adequate capital reserves and double-check with the sponsor that those funds will be used to operate the property rather than being distributed back to investors. In a DST, too much reserve capital can trigger 'boot,' and therefore be taxed. It is recommended to have a tax advisor review the balance sheet of your DST prior to investing to avoid any tax-risks.
What to Ask For
- Are capital reserves raised up front or ongoing from cash-flow?
- Beginning balances and targets for working capital
- What do you intend to cover with reserves? (Taxes/insurance, CapEx, leasing/TI/LC, interest payments)
Red Flags to Watch For
- !Minimal reserves
- !Using reserves to pay higher distributions in the first few years
- !Reserve budget that is so large it could trigger taxable boot on a DST
13Is there a bridge loan on the property? What's the worst-case scenario?
Why It Matters
Bridge loans are short-term, floating-rate debt used to acquire a property. They can work well during lease-up, renovations, or to bring a DST to market. They add refinance risk and interest rate risk potentially leading to cash flow sweeps, forced sales, or even foreclosure.
Key Takeaway
Bridge loans are not typically a risk factor that DST investors have to worry about. However, because they are short term, they become an issue when a DST does not raise equity fast enough to pay off the loan before the end of the term. Make sure you understand the terms of the bridge loan and how quickly the DST you are targeting will sell out. No matter the structure, make sure there is a plan to acquire long-term financing or a quick exit.
What to Ask For
- Loan snapshot: Maturity date, current all-in rate (index + spread), interest-only vs. amortizing, default rate
- Extensions: Number of options, cost, who pays?
- Rate cap: what are the terms, interest rate, and duration
- Covenants & triggers: DSCR/debt-yield thresholds and cash flow sweeps
- Cross-collateralization to other assets
- Presence of mezzanine debt or preferred equity
- Refinancing plan and target for long-term debt
Red Flags to Watch For
- !Slow equity raise (DST not selling out quickly)
- !No money reserved to extend the cap
- !Short maturity (<18 months) with big business-plan items still unfinished
- !Cash sweep already active
- !High leverage (e.g., >70% LTV) and a pro forma exit that assumes cap-rate compression or much lower refi rates
- !Hidden complexity: mezz/pref stacks, cross-defaults, prepay traps, or lender consent hurdles that block a refi or sale
Due Diligence & Reporting
Questions 14–17
14Did you conduct independent due diligence & audits?
Why It Matters
Third-party checks reduce blind spots and marketing spin.
Key Takeaway
Confirm that reports are independent and current. Ask how flagged items are being addressed.
What to Ask For
- Independent product-level diligence (e.g., FactRight, Buttonwood)
- Legal opinions on structure
- Audited or reviewed financials (if available)
Red Flags to Watch For
- !'Trust us' with no external review
- !Selective excerpts instead of full reports
- !Expired or draft opinions
15How is the loan structured?
Why It Matters
The way a deal's loan is structured can have a major impact on how the investment performs over time. Different lender types, such as banks, life insurance companies, agencies, and CMBS lenders each come with unique terms, leverage levels, and risk profiles. Likewise, loan features like fixed versus floating interest rates, or senior versus mezzanine or preferred debt positions, influence cash flow stability, refinancing options, and overall resilience during market stress.
Key Takeaway
Request a one-page Debt Term Summary including capital stack payment priority. Look for stress test models that show DSCR/Debt Yield with higher rates and lower NOI, and include prepay economics in exit IRR.
What to Ask For
- Product and lender type
- Fixed or floating rate
- Current all-in rate
- Terms like: IO period, amortization, maturity; prepay terms (lockout, yield maintenance/defeasance, step-down)
- Covenants (DSCR, Debt Yield, LTV), cash-management mechanics (hard/soft lockbox, cash flow sweep), rate caps, and extension options any cross-collateralization, reserve requirements
Red Flags to Watch For
- !Floating debt without a cap
- !Near-term maturity misaligned with the business plan
- !Harsh prepay penalties not accounted for in the exit model
- !Non-assumable debt when buyer pools expect assumption
- !Tight covenants near triggers with active cash sweep
- !Cross-defaults to other assets
- !Special-servicer control (CMBS) not accounted for in timing/fees
16Is there any liquidity on this investment?
Why It Matters
Most real estate syndications are illiquid or have limited liquidity.
Key Takeaway
Most real estate investments are considered illiquid until the sale of the asset. Make sure you understand the anticipated timeline before you invest and ensure you do not need access to those funds in the meantime.
What to Ask For
- Transfer restrictions
- Minimum hold periods
- Rights of first refusal
- Redemption features
- Secondary market options
Red Flags to Watch For
- !Redemption at sponsor discretion only with no standards
17How are taxes reported?
Why It Matters
Taxes drive net return and filing complexity.
Key Takeaway
Ask to see a sample tax package from a previous year to familiarize yourself and your CPA with this tax reporting for a given investment structure.
What to Ask For
- K-1 or substitute 1099
- Whether filing is required in multiple states
- Cost segregation/bonus depreciation plans
- UBTI/ECI considerations for IRAs
Red Flags to Watch For
- !Habitually late K-1s
- !Vague state filing guidance
- !Overstated tax benefits or non-GAAP 'tax yield' claims
Governance & Distributions
Questions 18–20
18How are major decisions made?
Why It Matters
Certain investment structures, like TICs, give investors voting rights on major decisions. This empowers investors to look after their own interests but is less passive and requires cooperation and trust in your co-investors.
Key Takeaway
Request a governance cheat sheet summarizing votes, thresholds, and timelines. Ensure material economic changes require investor consent and that reporting (financials, variance reports) is time-bound.
What to Ask For
- How key decisions are made including rights on sale, refinance, major amendments, budget changes; notice periods; dispute resolution steps
Red Flags to Watch For
- !Ability to change economics without investor consent
19How do you address DST/TIC specific constraints?
Why It Matters
DSTs and TICs have unique IRS limits that shape their strategy.
Key Takeaway
DSTs and TICs can perform well when managed conservatively within IRS limits. Strong reserves and prudent planning are key to long-term stability.
What to Ask For
- For DSTs: adequate capital reserves and conservative business plan because there are limits on new capital, development, lease changes, and refinancing/loan mods
- For TICs: unanimous-consent items, cash management, and partition rights
Red Flags to Watch For
- !Business plans that require actions a DST/TIC cannot do
- !No contingency for loan or major tenant changes
- !Unanimous consent hurdles with no workaround
20Distribution Policy: What Gets Paid, When, and From Where?
Why It Matters
Know how your distributions will work so you can plan accordingly.
Key Takeaway
Understand how distributions are paid and where rents flow after being collected from the tenant. Note that some cashflow being paid from reserves isn't necessarily a bad thing and can provide some tax sheltering. However, it should be disclosed, and in a DST, it could impact your 1031 tax deferral and result in boot. So always speak to your CPA/tax advisor before investing.
What to Ask For
- Frequency, priority
- Whether unpaid preferred return accrues
- If distributions can come from reserves or financing proceeds
Red Flags to Watch For
- !Paying 'yield' from debt or reserves without clear disclosure
- !No policy on pref accruals
- !Distributions that ignore DSCR or covenant triggers
What Next?
The structure of a real estate deal often matters as much as the property itself. By asking these 20 questions, you'll gain the clarity to separate strong, well-structured investments from those built on marketing and assumptions.
At Anchor1031, we help investors navigate the nuances of analyzing deal terms, risk factors, and tax implications to ensure each investment aligns with their goals.
Ready to Evaluate Your Next Deal?
Get instant access to the downloadable guide (PDF) with all 20 deal structure questions, red flags, and what to ask for. Plus, explore our marketplace of pre-vetted investment opportunities.
Frequently Asked Questions About Deal Structure
What is an investment structure in real estate?
An investment structure refers to how a real estate deal is legally and financially organized, including the entity type (DST, TIC, LLC, LP, REIT), the fee arrangements, debt terms, profit-sharing mechanisms, and governance rules. The structure determines your rights as an investor, how distributions are calculated and paid, and what risks you're exposed to beyond the underlying property performance.
Why do deal fees matter so much in real estate syndications?
Fees are a critical component of any investment structure because they represent real costs that affect the economics of the deal. Understanding fees helps you compare different opportunities on an apples-to-apples basis and evaluate whether the services provided justify the costs. Fees also reveal sponsor incentives. How and when sponsors get paid can indicate whether their interests align with yours. A thorough understanding of the complete fee stack (upfront, ongoing, and disposition) is essential for making informed investment decisions.
What's the difference between fixed and floating rate debt in real estate deals?
Fixed-rate debt locks in your interest rate for the loan term, providing predictable debt service payments. Floating-rate debt adjusts with market interest rates (typically SOFR plus a spread), which can increase or decrease payments over time. Floating debt often comes with lower initial rates but introduces interest rate risk. Many floating-rate loans include rate caps that limit how high rates can go, but these caps must be purchased and renewed.
What is a preferred return (pref) in a real estate syndication?
A preferred return is a contractual provision that establishes the order in which profits are distributed between investors and sponsors. It defines a threshold that must be met before the sponsor participates in profit-sharing. Preferred returns can be structured as cumulative (unpaid amounts accrue) or non-cumulative, and understanding whether returns are simple or compounding is important. This term is a key component of the waterfall structure and affects how economics are split between parties.
What are the key differences between DST and TIC structures?
Both DSTs (Delaware Statutory Trusts) and TICs (Tenant-in-Common) qualify for 1031 exchanges, but they differ significantly. DSTs are passive: investors have no voting rights or management control, and the trust cannot take on new debt, make major lease changes, or raise additional capital. TICs give investors direct ownership and voting rights on major decisions but require cooperation among co-owners. TICs can be more flexible but less passive, while DSTs offer simplicity but limited adaptability.
What is a promote or waterfall structure?
A promote (also called carried interest or waterfall) is the profit-sharing arrangement between investors and sponsors. After investors receive their preferred return and return of capital, remaining profits are split according to defined tiers. Some deals have multiple tiers where the sponsor's share increases at different levels. Understanding the waterfall structure is important because it defines how economics are divided between parties and can vary significantly from deal to deal.
What should I look for in a real estate deal's debt structure?
Key debt terms to evaluate include: interest rate (fixed vs. floating), loan-to-value ratio (LTV), debt service coverage ratio (DSCR) requirements, maturity date, amortization schedule, prepayment penalties, and whether there's an interest rate cap on floating debt. Also check for cross-collateralization with other properties, cash sweep provisions that redirect income to the lender, and covenant triggers that could restrict distributions or force a sale.
Why is an independent appraisal important when evaluating a real estate investment?
An independent appraisal provides a third-party opinion of the property's market value, separate from the sponsor's marketing materials. Comparing the offering price to the appraised value reveals the premium you're paying for syndication costs and fees. Be cautious of old appraisals (over 6 months), broker opinions of value (BOV) instead of full appraisals, or appraisals based on assumptions that haven't been realized yet (like future lease renewals or tax incentives).
Continue Your Real Estate Investing Education
Real Estate Due Diligence Checklist
20 critical questions to ask when evaluating the physical property, tenants, and market conditions
20 Questions to Ask a Real Estate Sponsor
Evaluate sponsor quality, track record, fee structures, and alignment before investing
Complete 1031 Exchange Guide
Learn how to defer capital gains taxes using 1031 exchanges, including timelines, rules, and replacement property options
Important Risk Disclosures
- Investments in real estate are speculative, highly illiquid, and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. You should not invest unless you can readily bear the consequences of potential losses, including the risk of total loss of capital.
- All information about any deal is qualified in its entirety by the issuer's Offering Documents that must be reviewed prior to investing, including risk factors, investment objectives, business plan, charges, expenses, and other important information.
- Tax laws, regulations, and IRS guidance regarding 1031 exchanges are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is not indicative of future results. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations.
- Internal Revenue Code Section 1031 ("Section 1031") contains complex tax concepts, and certain tax consequences may vary depending on the individual circumstances. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another. Before making any investment decisions or implementing any 1031 exchange strategies, you should consult with and rely on your own qualified legal, tax, and financial professionals who can provide advice tailored to your specific circumstances.