Advisor Fees and Conflicts When You're Sold a DST

The DST pays the broker-dealer out of your equity before the trust buys anything: a $1,000,000 example

In a syndicated DST the selling commission, dealer-manager fee, wholesaling costs and marketing reimbursements are all paid by the offering from the money you wire, which is why a law-firm outline describes load as 'baked into the investment cost basis.' Industry sources put selling commissions around 5% to 6% of equity, a dealer-manager fee near 1%, organization and offering costs of 2% to 3% and an acquisition fee near 2%, with total up-front loads commonly quoted between 7% and 12% and sometimes higher.

Hypothetical: on $1,000,000 of equity, a 6% selling commission is $60,000, a 1% dealer-manager fee $10,000, 2.5% of offering costs $25,000 and a 2% acquisition fee $20,000, so $115,000 is gone before the trust owns real estate and $885,000 is working. The property must appreciate about 13% just to return your equity to par.

FINRA Rule 2310 draws the outer line: total underwriting compensation above 10% of gross proceeds, or organization and offering expenses above 15%, are presumed unfair and unreasonable. Those are ceilings, not norms, and a PPM at the ceiling should prompt the question why.

Broker or adviser: the capacity decides who pays, what standard applies and what the person owes you

A broker-dealer representative is paid by the transaction, typically the commission the offering allocates, and owes you Regulation Best Interest. An investment adviser is 'a firm or person that, for compensation, engages in the business of providing investment advice' and is paid by you, usually a percentage of assets or a flat fee, which is why some fee-only advisers specialize in DSTs without taking the selling commission.

Many firms are both. Reg BI's disclosure obligation requires the firm to tell you in writing 'that the broker, dealer, or such natural person is acting as a broker' when making the recommendation, and dual registrants must deliver a Form CRS of up to four pages covering both roles. Ask which hat is on for this specific recommendation and get the answer on paper.

Check the person before the product: BrokerCheck (brokercheck.finra.org) shows a broker's registrations, employers and disclosures by CRD number, and the SEC's adviser database (adviserinfo.sec.gov) does the same for advisers. Breakwater Exchange operates within a regulated broker-dealer framework and is licensed in all 50 states; the same checks apply to us.

Five conflicts built into DST distribution and the Reg BI provision that addresses each

Fee-only advice is not conflict-free either: an asset-based fee charged on an illiquid DST value gives the adviser a reason to keep you invested and to accept the sponsor's valuation of the interest. Ask how the DST is valued for billing.

• Paid only if you buy: a commission arrives if you subscribe and nothing if you pay the tax, so the care obligation's requirement to consider 'reasonably available alternatives' is the rule to invoke.
• A limited menu: broker-dealers approve a list of sponsors, and the SEC's guide treats recommending from a limited or proprietary range as a material limitation that must be disclosed.
• Sponsor reimbursements: managing broker-dealers are often reimbursed for marketing and due-diligence expenses on top of fees, which Reg BI requires to be disclosed as a material fact about conflicts.
• Sales incentives: 17 CFR 240.15l-1(a)(2)(iii)(D) requires firms to eliminate sales contests, quotas and bonuses tied to sales of specific securities within a limited period.
• Affiliation: some brokers are affiliated with sponsors, a relationship that must be disclosed; Form D Item 3 (related persons) and Item 12 (everyone paid sales compensation, with CRD numbers) let you check.

Ten questions to put in writing before you sign the subscription agreement

Written answers matter because Reg BI is enforced on what was disclosed, and a firm that will not put compensation in writing is telling you something.

• In dollars, how much of my investment goes to you, your firm and the sponsor's affiliates, and on which page of the PPM is that table?
• Are you recommending this as a broker or as an adviser, and where does your Form CRS describe that capacity?
• What would you earn if I paid the tax instead and bought an index portfolio through you?
• Which sponsors are on your platform, which are not, and what did the firm's due-diligence review of this one find?
• Does your firm receive marketing, due-diligence or conference reimbursements from this sponsor?
• Does this offering have more than one class of interest with different loads, and which one am I being offered?
• Who paid for the third-party due-diligence report you are relying on?
• What is the Form D estimate of sales commissions (Item 15) and the amount going to insiders (Item 16)?
• What disclosures appear for you and your firm on BrokerCheck or the adviser database?
• Would you still recommend this trust if it paid you nothing?

Put the load against the tax in dollars: with a big gain the load loses, with a small gain the tax is cheaper

Hypothetical seller with $1,000,000 of equity and $600,000 of gain, of which $200,000 is straight-line depreciation: federal tax is roughly $200,000 at 28.8% (the 25% recapture rate plus 3.8% NIIT) and $400,000 at 23.8%, about $153,000 before state tax. Against an 11.5% load of $115,000 the exchange still wins, and the tax is deferred while the load is permanent, so the gap widens if the trust performs.

Shrink the gain to $150,000 and federal tax is roughly $36,000, well under the same $115,000 load; paying the tax and investing without a load is the better outcome unless state tax or a step-up plan changes the picture (DST vs paying the tax).

That comparison is the one a commissioned recommendation rarely shows, and the one your CPA should run before you sign.