NEW YORK, May 16, 2025 -- Overview At Fortitude Investment Group, we often advise investors on how to wisely transition their appreciated real estate into passive, diversified portfolios through Delaware Statutory Trusts (DSTs). This case study demonstrates the real-world consequences of ignoring diversification when the majority of one's net worth is allocated to just one or two single-tenant net lease properties, and how a DST strategy could have preserved income, reduced risk, and created estate planning flexibility.
Background Two years ago, a prospect was introduced to our team. Her equity totaled approximately $2,250,000 — representing over 80% of her total net worth. We discussed the advantages of DSTs as 1031 replacement properties, particularly their diversification across sectors, tax efficiency, and estate planning strategies such as optional 721 UPREIT conversions. She was especially interested in single-tenant NNN properties, which DSTs can incorporate either all-cash or with institutional leverage.
The Decision Despite our conversations, the client was referred to a fee-simple real estate broker who encouraged her to acquire two single-tenant NNN properties. One of the properties was marketed as an absolute NNN lease with a strong guarantee. The tenant was a franchisee operator with over 100 locations, and the property was positioned at a traffic light intersection near hotels and schools. However, the property was in a remote town with a population of fewer than 5,000 people. The attractive feature was a 7% cap rate.
The Problem What the client failed to realize — and what the broker failed to fully disclose — was that the guarantor was not the investment-grade parent company. Instead, it was a franchisee with an early termination clause within the first five years. Predictably, the operator exercised that clause, halted rent payments, and vacated the location.
This resulted in an immediate and complete loss of income from that $750,000 investment — a devastating blow to the client, who relied on those distributions to support her lifestyle.
The second property continues to generate income, but has its own risks: if the corporate parent company closes the location, even though rent is guaranteed, re-tenanting or the resale market may prove difficult.
What If She Had Chosen DSTs? Had the client pursued the DST strategy we initially presented, she could have diversified her $2.25M into multiple institutional-grade DSTs across different sectors:
- Industrial, multifamily, retail, self-storage, healthcare, and more.
- Investment-grade tenants with strong financials.
- Geographic diversification across major U.S. markets.
- Optional leverage for those seeking enhanced depreciation.
- Optional 721 UPREIT strategies to roll real estate into operating partnership units for estate planning.
Moreover, DSTs can include portfolios of absolute net lease single-tenant assets — the very product type she liked — but with stronger credit tenants, larger population centers, and a team of asset managers actively monitoring performance and tenant strength.
The Lesson For accredited investors nearing or in retirement, income consistency and risk mitigation are critical. Allocating 80% of one's net worth into just two properties — especially without understanding lease structure, market strength, and creditworthiness — is an avoidable risk.
DSTs offer not only tax deferral via 1031 exchange, but also access to institutional real estate, sector and geographic diversification, and estate planning tools that single-tenant investments cannot match alone.
Conclusion Today, the client continues to struggle with the consequences of that decision — a vacant property, lost income, and few options to recover. This case highlights why diversification through DSTs should always be considered when handling large 1031 exchanges, particularly when dealing with life savings and estate legacy.
Let this be a cautionary tale — and a call to explore smarter, more stable solutions through a professionally managed DST portfolio.
For more information, visit www.1031dst.com or contact our team for a consultation.
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