Passive NNN Investing Through Delaware Statutory Trusts

What Makes NNN Properties Ideal for DST Structure

The triple net lease structure and Delaware Statutory Trusts align structurally. Tenants pay property taxes, insurance, and maintenance on top of base rent. The landlord receives clean cash flow with minimal deductions. DSTs are structured as fixed investment trusts under IRS rules, meaning the trustee has minimal powers and investors remain entirely passive.

NNN properties require minimal active management, making them natural candidates for the DST framework. The trustee cannot renegotiate leases, borrow new funds, or make major capital improvements. These restrictions, known as the "Seven Deadly Sins" from Revenue Ruling 2004-86, would be crippling for most property types. For NNN properties, they formalize what is already the operating reality.

Approximately 80% of DST offerings feature NNN lease structures. The Revenue Ruling requires DSTs to operate as passive investment trusts. NNN properties are one of the few commercial real estate categories that can thrive within those constraints.

Predictable Income for Passive Investors

Long-term leases with credit-rated tenants create income stability. NNN REIT's portfolio carries a weighted average remaining lease term of 10.2 years, which is typical for institutional net lease portfolios. Most NNN leases include either fixed annual rent bumps of 1-2% per year or periodic increases tied to CPI. These escalations are predetermined at lease signing, not negotiated later.

Because tenants absorb property-level expense volatility, unexpected property tax reassessments or insurance premium spikes do not reduce investor distributions. The tenant bears that risk under the lease terms. DST sponsors may project distributions with greater confidence when the underlying properties feature this income structure, though actual distributions depend on tenant performance and market conditions.

Reduced Management Complexity

The Seven Deadly Sins restrict DST trustees from active management: no new leases, no renegotiating debt, no capital improvements beyond minor repairs required by law. A master lease structure is typically established between the DST and a master tenant entity, with the sponsor controlling operations through the master tenant and property manager.

The DST trustee manages business affairs including mortgage payments and investor distributions. An independent trustee serves as a safeguard for lender interests. The signatory trustee handles operational matters within the boundaries the trust agreement establishes.

Institutional Tenant Quality

Major corporations prefer NNN leases for budget certainty. DST sponsors can access institutional-grade tenants that individual investors typically cannot reach directly. NNN REIT's top lines of trade include automotive service at 18.6% of annual base rent, convenience stores at 16.3%, limited-service restaurants at 7.9%, entertainment at 7.2%, and dealerships at 6.6%.

Credit-rated tenants anchor most institutional portfolios. Investment-grade ratings of BBB- or higher indicate lower default probability but command lower cap rates. Non-investment-grade tenants offer higher yields with correspondingly higher credit risk.

Types of NNN Properties in DST Offerings

Different NNN property types carry different risk and return characteristics. Cap rate data provides a benchmark, though investors should focus on cash-on-cash returns after fees and leverage. Historical cap rates and market data referenced below reflect recent conditions and are not indicative of future property values or investment returns.

Retail NNN (Drugstores, Dollar Stores, QSR)

Retail NNN properties feature tenants like Walgreens, CVS, Dollar General, Starbucks, and Chick-fil-A. Single-tenant retail cap rates remained in the mid-6% band in 2025, while multi-tenant retail averaged mid-7%. In aggregate, retail cap rates have stabilized around 6.8%.

Service-oriented retail shows greater e-commerce resilience than merchandise retail. Drugstores provide pharmacy services, quick-service restaurants require in-person dining, and automotive service centers perform work that cannot be completed online. Limited new construction supports stable occupancy. A record-low 30 million square feet of retail space is expected in 2026, with over 70% single-tenant.

Industrial NNN (Warehouses, Distribution Centers)

Industrial NNN properties house tenants like Amazon, FedEx, and UPS. E-commerce growth drives demand for last-mile distribution space. Typical cap rates range from 5% to 6.5%. Purpose-built facilities typically carry 15- to 20-year lease terms with renewal options. The specialized nature creates both tenant stickiness and re-tenanting risk. Triple-net REITs in this sector report average occupancy of 98.6% and average lease terms of 10.3 years.

Medical NNN (MOBs, Dialysis, Urgent Care)

Medical NNN properties include medical office buildings, dialysis centers, and urgent care facilities. By 2030, 20% of the U.S. population (70 million) will be 65 or older, and seniors account for 37% of all healthcare spending. Medical office building cap rates averaged 6.9% in Q2 2024, 50 basis points below traditional office at 7.4%. MOB triple-net asking rents increased 1.4% year-over-year to a record $24.86 per square foot.

Physician practice consolidation can lead to lease restructuring requests. Changes in healthcare reimbursement policies affect tenant financial performance. Specialized medical facilities may prove difficult to re-tenant if the original occupant departs.

Net Lease Office

Corporate headquarters and single-tenant office buildings carry higher tenant-specific risk. Remote and hybrid work trends have created headwinds for the sector. Traditional office cap rates averaged 7.4% in 2024, notably higher than other NNN sectors. Net lease office cap rates typically range from 6.5% to 8%. Long remaining lease terms and strong tenant credit are essential to mitigate sector risk.

Benefits of NNN DST Investing

Professional Management, No Landlord Duties

DST sponsors handle all property operations, including tenant relationships, maintenance coordination, lease administration, and tax filings. Investors receive quarterly distributions and annual K-1 tax documents. The DST trustee manages business affairs including mortgage payments and investor distributions.

Direct NNN ownership, often marketed as passive, still requires tenant correspondence, property inspections, insurance management, and disposition planning. DST investors delegate all of those responsibilities. The trade-off is control. DST investors cannot influence property decisions or determine disposition timing.

1031 Exchange Eligibility

IRS Revenue Ruling 2004-86, issued in July 2004, confirmed that beneficial interests in a properly structured DST qualify as like-kind replacement property under IRC Section 1031. Investors are treated as owning an undivided fractional interest in the DST's underlying real property for tax purposes.

Revenue Procedure 2020-34 provided additional flexibility during the COVID-19 pandemic, temporarily allowing limited loan modifications, lease modifications, and capital contributions without disqualifying DST tax treatment. The 20th anniversary of Revenue Ruling 2004-86 passed in 2024. As Baker McKenzie noted, the syndicated DST structure will likely remain a cornerstone of the securitized real estate offering industry as long as Section 1031 remains viable.

DST investments work well for 1031 exchanges because they eliminate the 45-day property identification stress. DST offerings are available immediately, pre-packaged, and require no property hunting.

Portfolio Diversification

Investing across multiple DST offerings provides diversification by property type, tenant, geography, and sponsor. A $500,000 allocation spread across five DST offerings achieves diversification that a direct NNN buyer would need $5 million or more to replicate. Use our tools to build a diversified portfolio tailored to your investment goals.

NNN REIT illustrates diversification at scale. Their portfolio spans all 50 states. No single tenant exceeds 4.3% of annual base rent. The top 20 tenants represent only 46% of total rent, with 54% spread across more than 2,250 other tenants. DST investors can implement similar principles at smaller scale by allocating across 4 to 6 different offerings.

Lower Minimums Than Direct NNN

DST minimums typically range from $50,000 to $100,000 per offering. Direct NNN property purchases require $1 million or more for investment-grade assets, with down payments of $300,000 to $500,000 even with financing. Accredited investor status is required, generally meaning $200,000 or more in annual income or $1 million or more in net worth excluding primary residence.

DST minimums in the $50,000 to $100,000 range allow precise matching of 1031 exchange amounts across multiple offerings.

How to Evaluate NNN DST Sponsors

Sponsors select properties, complete underwriting, arrange financing, and manage operations throughout the hold period. Sponsor quality determines whether projected returns materialize. Baker McKenzie's 2024 analysis notes that increased competition, as both smaller-scale sponsors and large non-traded REITs have entered the market, makes sponsor due diligence more important than ever.

Track Record and Experience

Relevant metrics include years in the DST business, number of offerings completed, and full-cycle performance through disposition. A sponsor with 20 syndicated offerings and zero completed dispositions provides no evidence of exit execution. A sponsor with 50 completed cycles demonstrates capability across market conditions.

Historical return performance compared to original projections reveals sponsor conservatism. Sponsors whose realized returns consistently exceed projections likely underwrite conservatively. Sponsors whose returns fall short may be overly aggressive or ineffective at asset management.

Asset Management Capabilities

Quality asset management becomes visible during tenant distress or market disruption. The way sponsors handle lease modifications, re-tenanting after vacancies, and maintenance issues affects long-term returns. Sponsors should be able to describe their approach to operational challenges with specific examples from past offerings.

Investor reporting quality indicates sponsor transparency. Quarterly reports with property-level financials, occupancy updates, and commentary demonstrate commitment to communication. Annual summary reports alone suggest less engaged management.

Fee Structure Transparency

All fees should be disclosed in the Private Placement Memorandum. Standard fees include acquisition (1-3%), financing (0.5-1%), asset management (0.5-1% annually), property management (2-4% of revenue), and disposition (1-3% at sale). DSTs typically charge 5% to 10% in one-time up front fees that are included in the pricing of the offering..

Lower fees do not automatically indicate better value. High-quality sponsors may deliver better risk-adjusted returns despite higher fees. Sponsor co-investment creates alignment. The signatory trustee typically retains a minimum interest in the DST.

Exit Strategy History

Track record of successful dispositions matters more than acquisition volume. Sponsors should document actual hold periods, exit cap rates, and investor returns for past offerings. Disposition timing relative to market conditions demonstrates judgment. Some sponsors offer 1031 rollover options or 721 UPREIT conversion at exit, indicating sophistication and planning.

Minimum Investments and Fee Structures

Typical Investment Minimums

Standard minimums range from $50,000 to $100,000 per DST offering. Accredited investor requirements apply, meaning $200,000 or more in annual income or $1 million or more in net worth excluding primary residence. 1031 exchange investments may have higher minimums to accommodate exchange structuring.

Common Fee Types

Fee structures follow general patterns. Acquisition fees of 1% to 3% compensate sponsors for property sourcing and due diligence. Financing fees of 0.5% to 1% cover loan arrangement. Asset management fees of 0.5% to 1% annually compensate for ongoing oversight. Property management fees of 2% to 4% of revenue cover operations. Disposition fees of 1% to 3% compensate for managing the eventual sale and incentivize the sponsor to sell the property for the highest possible valuation at the most opportune time for investors.

DSTs typically charge 5% to 10% in total front end fees. These fees are pre-calculated into the projected cash-on-cash returns disclosed in the PPM. With a property carrying 50% leverage, the effective fee impact is reduced because investors are buying twice as much property and only getting charged fees on their equity.

How Fees Affect Returns

A property with a 7.0% cap rate might yield approximately 5.5% to 6.5% in Year 1 cash-on-cash to investors after fees, depending on leverage and fee structure. Actual distributions can change over the hold period based on property performance and expenses. Compare total fee burden across offerings over a typical hold period rather than individual line items.

Expected Hold Periods and Exit Strategies

Typical DST Hold Periods

Target hold periods typically range from 5 to 10 years. Actual hold periods depend on market conditions, remaining lease term, and sponsor strategy. Some DSTs structured for 721 UPREIT conversion may have shorter hold periods of approximately 2 years. DST investments have no secondary market. Plan for capital to be committed for the full hold period.

Exit Scenarios

Property sale is the most common exit. The sponsor markets and sells the property through brokers, and proceeds are distributed proportionally after paying off any mortgage, costs, and fees. When structured properly, investors may reinvest proceeds in a new 1031 exchange.

721 UPREIT conversion allows investors to contribute DST interests to a REIT operating partnership in exchange for OP units, deferring capital gains tax further under IRC Section 721. Not all sponsors offer this option, and it typically requires a relationship with a REIT willing to acquire the property.

What Happens at Disposition

Springing LLC conversion serves as a last resort when the DST encounters operational challenges that cannot be resolved within the Seven Deadly Sins restrictions. This conversion potentially eliminates future 1031 exchange eligibility. Capital gains tax applies to any disposition proceeds not rolled into a qualifying 1031 exchange.

Anchor1031's Sponsor Vetting Process

Anchor1031's designated broker-dealer, Great Point Capital, conducts due diligence on DST offerings before they are made available to investors. This process reviews sponsor assumptions, fee structures, property fundamentals, and risk factors to assess whether an offering's financials are reasonable relative to current market conditions.

Areas of review generally include sponsor track record assessment, asset management capabilities, fee transparency, and disposition history. The goal is to identify offerings built on conservative, supportable assumptions rather than optimistic projections. This due diligence does not guarantee investment outcomes, and all DST investments carry risk including potential loss of principal.

Anchor1031 maintains relationships with sponsors across different asset class specializations, enabling investors to build diversified portfolios through vetted offerings. This approach provides access to institutional-quality NNN DST investments suitable for 1031 exchange structuring.

Direct NNN Ownership vs. DST: Making the Right Choice

Direct NNN ownership can make sense for investors with $3 million or more available to build a diversified portfolio across multiple properties. Direct ownership provides complete control over property decisions, lease negotiations, and disposition timing. Direct owners also retain full financing flexibility and can refinance when market conditions improve. Investors who do not need 1031 exchange qualification may prefer direct ownership to avoid the restrictions that Revenue Ruling 2004-86 compliance imposes.

DST investment makes sense for investors who want NNN passive income starting at $50,000 to $100,000 per investment. Professional management eliminates all landlord duties. The 45-day identification period creates significant pressure for direct buyers searching for suitable properties, while DST offerings are available immediately, pre-vetted, and close quickly.

Diversification across multiple properties, tenants, geographies, and sponsors becomes practical at lower capital levels through DST investment. Building comparable diversification through direct ownership requires substantially more capital and management capability. Personal loan guarantees are not required for DST investments because the DST entity borrows at the trust level. Direct NNN buyers typically sign personal guarantees for acquisition financing, particularly for properties under $5 million.

Frequently Asked Questions

Next Steps for DST Investors

NNN properties and DST structure combine naturally for passive investors who want potentially stable income without landlord responsibilities. The alignment between triple net lease mechanics and fixed investment trust requirements creates a framework where minimal management may produce more predictable cash flow, though distributions are not guaranteed and can fluctuate based on tenant and property performance.

This is not risk-free investing. Tenant defaults, market shifts, sponsor execution failures, and illiquidity constraints are genuine concerns -- understanding NNN investment risks is essential before committing capital. The Seven Deadly Sins restrictions that enable 1031 exchange qualification also prevent adaptive management when circumstances change. Investors who value operational flexibility or active involvement should consider direct ownership instead.

For investors seeking passive NNN exposure, particularly those completing 1031 exchanges, the DST structure provides access to institutional-quality properties at accessible minimums with professional management. The structure works because it acknowledges, rather than fights against, the limited management requirements that NNN leases create.

The focus should remain on sponsor quality, property fundamentals, tenant credit, and realistic return expectations. Anchor1031 can help assess specific offerings, evaluate sponsor track records, and structure allocations across multiple DST investments.

Every investor's situation is different, and the right structure depends on your goals, tax position, and risk tolerance. Consulting with a CPA or tax advisor familiar with your circumstances is an important step before making any investment or exchange decision. The Anchor1031 team can help you evaluate specific options with that context in mind. Reach us at (502) 556-1031 or schedule a call at anchor1031.com.