DST vs. Direct NNN Ownership: Which Is Right for Your Client?

Your client just sold an investment property. The 45-day identification clock is ticking. They want to stay in real estate, they want passive income, and they never want to deal with a tenant again.

Two options land on the table: buy a single-tenant net lease property directly, or invest in a Delaware Statutory Trust that holds one.

On the surface, these look similar. Both involve NNN-leased commercial real estate. Both can qualify as replacement property in a 1031 exchange. Both generate passive income backed by a tenant's obligation to pay rent.

But from an advisor's perspective, these are fundamentally different recommendations with different risk profiles, different suitability considerations, and different long-term implications for your client. Understanding the distinctions is what separates a transactional 1031 closing from a well-structured wealth plan.

Control vs. Simplicity

This is the first fork in the road and usually the most decisive one.

Direct NNN ownership gives your client full control. They choose the property, negotiate the purchase price, select the lender, decide when to sell, and manage the asset — or hire someone to manage it — on their own terms. For clients who want to remain active participants in their real estate portfolio, this matters.

A DST removes all of that. The sponsor selects the property, negotiates the acquisition, arranges financing, and manages the asset for the duration of the hold period. The investor owns a fractional beneficial interest in the trust and receives their proportional share of income. They have no vote, no management authority, and no ability to influence operating decisions.

For some clients, giving up control is a dealbreaker. For others — particularly retirees, clients dealing with health issues, or investors who have spent decades as active landlords — giving up control is the entire point.

The advisor's job is to figure out which camp your client falls into before you ever discuss a specific property or offering.

Tenant Credit Quality and Access

When a client buys a NNN property directly, tenant credit quality is constrained by their budget. A single-tenant property leased to a publicly traded investment-grade tenant — think Walgreens, FedEx, or Dollar General — typically starts at $3 million and goes up from there. Properties leased to the strongest credits in the best locations can trade at $10 million or more.

That means a client with $1.5 million in exchange proceeds is often looking at properties leased to regional tenants, franchise operators, or smaller credits that don't carry a public rating. These tenants may be perfectly good operators, but they introduce a level of credit risk that is harder to evaluate and harder to monitor over a 10-year hold period.

DSTs solve this problem through scale. Because a DST pools capital from multiple investors, the sponsor can acquire properties that no individual investor could access alone. A $15 million property leased to a BBB+ rated tenant becomes accessible to an investor contributing $250,000 — a fraction of what it would cost to buy that property directly.

For advisors, this is a meaningful suitability advantage. If your client's primary concern is credit quality and income security, a DST may give them access to a stronger tenant than they could afford on their own.

Financing and Debt Replacement

Most 1031 exchange investors need to replace the debt from their relinquished property to avoid taxable boot. How that debt replacement works differs significantly between direct ownership and a DST.

With a direct purchase, your client applies for a mortgage independently. They go through underwriting, provide personal financial statements, and typically sign a personal guarantee or recourse loan. If financing falls through during the exchange window, the entire 1031 is at risk.

In a DST, the financing is already in place. The sponsor arranges non-recourse debt at the trust level before the offering is made available to investors. Your client's share of the trust-level debt counts toward their debt replacement requirement without any personal guarantee, without an individual loan application, and without the risk of a financing contingency collapsing the exchange.

For clients who have difficulty qualifying for commercial financing — whether due to age, retirement income, or credit complexity — the pre-arranged non-recourse debt inside a DST can be the difference between completing the exchange and failing it.

Diversification

A client who buys a single NNN property directly has concentrated their entire exchange proceeds into one asset, one tenant, one market, and one lease. If that tenant vacates, 100 percent of their rental income disappears overnight.

DSTs offer two layers of diversification. First, some DSTs hold multiple properties within a single trust, spreading risk across tenants and geographies. Second — and more importantly — because DST minimums are typically $100,000 to $250,000, a client with $1 million in exchange proceeds can invest across three or four different DSTs, each holding a different property type in a different market with a different tenant.

That kind of diversification is nearly impossible to achieve through direct ownership at the same capital level. An advisor who helps a client build a diversified DST portfolio rather than concentrating into a single property is providing institutional-level portfolio construction at the individual investor level.

Exit Strategy and Future Flexibility

This is where the two paths diverge most dramatically and where advisors need to set clear expectations.

With direct ownership, your client controls the exit. They decide when to sell, they choose the buyer, and they can execute another 1031 exchange on their own timeline. They also have the option to refinance, pull equity, or restructure the ownership during the hold period. Flexibility is maximized.

With a DST, the exit is determined by the sponsor. When the sponsor decides to sell the property — typically five to ten years after acquisition — the investors receive their proportional share of sale proceeds. There is no early exit mechanism, no secondary market of meaningful size, and no ability to force a sale.

However, some DST sponsors offer a 721 UPREIT exchange pathway at disposition, which allows investors to exchange their DST interest into operating partnership units of a REIT on a tax-deferred basis. This can provide a path toward greater liquidity and broader diversification that direct NNN ownership cannot replicate.

Advisors must be direct with clients about the illiquidity of DSTs. If there is any chance your client will need access to this capital within the hold period, a DST is the wrong vehicle — full stop.

Cost of Entry and Transaction Speed

Direct NNN acquisitions take time. Your client needs to find the property, negotiate terms, conduct due diligence, arrange financing, and close — all within the 180-day exchange window. For clients in competitive markets, suitable properties may receive multiple offers before your client can act.

DSTs are pre-packaged. The property is already acquired, the financing is in place, the due diligence is complete, and the offering documents are ready. An investor can identify a DST as replacement property and close in as little as a few days. This speed is particularly valuable late in the identification window or when a direct acquisition falls through and the client needs a backup.

Many experienced advisors identify both a direct property and a DST during the 45-day window — the direct property as the primary target and the DST as a safety net. If the direct deal closes, the DST identification is never used. If it falls through, the DST saves the exchange.

A Side-by-Side Framework for Advisors

When evaluating which path is right for a specific client, consider these five questions:

Does your client want to remain actively involved in property decisions? If yes, direct ownership. If no, DST.

Does your client need access to investment-grade tenant credit that exceeds their individual purchasing power? If yes, DST.

Can your client independently qualify for commercial financing, or do they need the non-recourse debt structure of a DST? If they need non-recourse, DST.

Is diversification across multiple properties, markets, and tenants a priority? If yes, DST — or a combination of a direct property and one or more DSTs.

Does your client need potential access to this capital within the next five to ten years? If yes, direct ownership provides more flexibility.

There is no universally correct answer. The right recommendation depends on the client's financial situation, risk tolerance, management preferences, and long-term goals. The advisor's role is to lay out both options honestly and help the client make an informed decision — not to default to whichever option is easier to execute.

How Medalist Structures Its DST Offerings

At Medalist Diversified, Inc. (NASDAQ: MDRR), we focus exclusively on single-tenant net lease properties with investment-grade tenants rated BBB+ or better. Our offerings are designed for the advisor who wants to recommend a DST with confidence — backed by the transparency of a publicly traded sponsor, audited financials, FactRight third-party due diligence, and non-recourse financing already in place at closing.

We built this platform for the advisor who sits across the table from a client and needs to answer one question with certainty: "Can I verify everything this sponsor is telling me?"

With Medalist, the answer is yes — before you ever pick up the phone.

If your firm is evaluating DST sponsors for your 1031 exchange clients, or if you want to learn more about how our current offerings compare to direct NNN alternatives, we welcome the conversation.

Contact us at Solutions@MedalistDST.com or call (949) 415-6633.

Information is for educational purposes only and does not constitute an offer to buy or sell securities. Consult your tax or legal advisor before making investment decisions. Past performance does not guarantee future results. All investments involve risk, including possible loss of principal. Delaware Statutory Trusts involve risks including illiquidity, loss of depreciation benefits, and limited control. Medalist Diversified, Inc. is not a tax or legal advisor.