8-K: Medalist REIT Subsidiary Sells Tesla Property to DST

Medalist Diversified REIT's subsidiary has contributed a Tesla facility to a Delaware Statutory Trust, receiving cash and beneficial interests, with the DST securing a new $7.71 million loan.

Summary

• Medalist Diversified REIT, Inc. (the "Company") announced that its wholly-owned subsidiary, MDRR XXV Depositor 1, LLC (the "Depositor"), contributed its ownership interest in a Tesla sales, service, and delivery facility located in Pensacola, Florida, to MDRR XXV DST 1 (the "DST"), another wholly-owned subsidiary of the Company.
• The Tesla Property consists of a 45,461 square foot, single-story building on 3.498 acres of land.
• The Contribution was made in exchange for total consideration of $14,554,504, based on the price the Company paid to acquire the property on July 18, 2025.
• Upon closing, the Company received $6,932,061 in cash and beneficial interests in the DST with an approximate aggregate net value of $7,622,443.
• The DST was formed to hold title to the Tesla Property and plans to offer beneficial interests to accredited investors in a private placement under Regulation D.
• The proceeds from this private placement will be used to redeem the Depositor's beneficial interests for cash, after which the Company expects to no longer retain an ownership interest in the DST.
• The Company will continue to control the Tesla Property's operations as the Trust Manager of the DST.
• The DST entered into a Loan Agreement with Pinnacle Bank for $7,710,000.00, secured by the Tesla Property.
• Medalist Diversified Holdings, LP, the Company's operating partnership, provided a limited guaranty for certain recourse obligations under the Loan Agreement.

Sentiment

Score: 7

Explanation: The transaction provides immediate cash liquidity to the Company while retaining operational control and a mechanism for future capital raise through a private placement. The risks associated with the limited and full recourse guaranties are standard for such structured financing, but the complexity of the DST and reliance on future private placement success introduce some uncertainty.

Positives

• Received $6,932,061 in cash from the transaction, improving liquidity.
• Retains beneficial interests in the DST valued at $7,622,443, maintaining exposure to the property's performance.
• Continues to control the Tesla Property's operations as the Trust Manager, ensuring ongoing management influence.
• The transaction facilitates a future private placement to accredited investors, potentially diversifying ownership and raising additional capital.

Negatives

• The Company's operating partnership, Medalist Diversified Holdings, L.P., is providing a limited guaranty for certain potential costs, expenses, losses, and damages under the $7.71 million loan, exposing the operating partnership to specific liabilities.
• The operating partnership's guaranty becomes full recourse for the entire loan balance in the event of certain bankruptcy or insolvency proceedings involving the DST, or if the Borrower fails to cause a Conversion to an LLC when required, among other triggers.
• The DST structure and subsequent private placement introduce complexity and regulatory compliance requirements (e.g., securities laws, Delaware Statutory Trust Act).

Risks

• Limited Recourse Liability Triggers: Guarantor (Medalist Diversified Holdings, L.P.) is liable for losses arising from fraud, intentional misrepresentation, gross negligence/willful misconduct, material physical waste, misappropriation of funds, failure to pay impositions/insurance (under specific conditions), failure to deliver security deposits, certain taxes, non-compliance with cash management, impeding Lender's enforcement actions, false financial statements, partition actions, failure to comply with statutory trust laws, unauthorized Trust Agreement changes, failure of Trust Manager to comply, tax consequences from dissolution/conversion, beneficial interests not qualifying for 1031 exchange, securities law violations, and unauthorized lease changes.
• Full Recourse Liability Triggers: The entire $7,710,000.00 loan becomes fully recourse to the Guarantor if the Borrower, any SPE Component Entity, or controlling person files for voluntary bankruptcy, colludes in involuntary bankruptcy, consents to bankruptcy, consents to receiver appointment, makes an assignment for creditors, admits insolvency, fails to cause a Conversion to an LLC when required, violates SPE/separateness covenants, the property becomes an asset in a bankruptcy not dismissed within 60 days (unless filed by Lender), the first monthly debt service payment is not made, Borrower fails to obtain Lender's consent for certain indebtedness, or voluntarily grants prohibited liens.
• Regulatory Compliance: The DST must comply with Delaware Statutory Trust Requirements and securities laws (Regulation D for private placement to accredited investors).
• Operational Control Risk: While the Company retains operational control as Trust Manager, it will no longer have an ownership interest in the DST after the private placement, potentially limiting its direct financial upside from property appreciation.
• Market Risk for Private Placement: The success of the private placement to redeem the Depositor's beneficial interests depends on market conditions and investor appetite for DST interests.
• Consolidation Risk: The Company will continue consolidating the DST in its financial statements until it sells greater than 50% of the beneficial interests, impacting its financial statements.

Future Outlook

The Company expects to sell its beneficial interests in the DST to accredited investors through a private placement, using the proceeds to redeem the Depositor's interests. Upon completion of this offering, the Company anticipates no longer retaining an ownership interest in the DST but will continue to manage the Tesla Property's operations. The Company will consolidate the DST in its financial statements until over 50% of beneficial interests are sold, then switch to the equity method.

Management Comments

• The Company expects to continue consolidating the DST in its financial statements under applicable accounting guidance until it has sold greater than 50% of the beneficial interests in the DST, at which time the Company will account for its ownership of any remaining beneficial interests in the DST under the equity method of accounting.

Industry Context

This transaction aligns with a common strategy in the REIT sector, particularly for companies seeking to optimize their portfolio and potentially unlock value through structured finance. Utilizing a Delaware Statutory Trust (DST) allows for fractional ownership, which can be attractive to investors seeking 1031 exchange opportunities, effectively broadening the investor base beyond traditional REIT equity. The sale of a single-tenant, high-credit tenant (Tesla) property into a DST can provide liquidity to the REIT while maintaining operational control and potentially generating fee income as Trust Manager. This strategy can also help manage debt on specific assets and potentially improve the REIT's overall financial ratios by offloading direct ownership while retaining management fees.

Comparison to Industry Standards

• The use of a Delaware Statutory Trust (DST) for real estate investment is a well-established structure, particularly for facilitating 1031 like-kind exchanges for individual investors. Companies like ExchangeRight and Passco Companies frequently sponsor DST offerings for various property types, including retail and industrial, often with single-tenant, net-leased properties.
• The structure allows the REIT to monetize an asset while potentially retaining management fees and operational control, similar to how some private equity real estate firms might structure deals to bring in co-investors or provide exit opportunities for specific assets.
• The loan terms, including a floating rate (Term SOFR + 2.50%) and a 5-year scheduled maturity, are within typical commercial real estate financing parameters for single-tenant properties. The origination fee of $38,550 on a $7.71 million loan is approximately 0.5%, which is a reasonable market rate.
• The detailed recourse provisions in the guaranty are standard for non-recourse commercial mortgage-backed securities (CMBS) style loans, where specific "bad boy" acts trigger full or partial recourse to a guarantor, ensuring alignment of interests and deterring detrimental actions by the borrower.

Related Party Transactions

• MDRR XXV Depositor 1, LLC (wholly-owned subsidiary of Medalist Diversified REIT, Inc.) contributed the Tesla Property to MDRR XXV DST 1 (wholly-owned subsidiary of Medalist Diversified REIT, Inc.).
• MDRR XXV DST 1 was formed by MDR XXV Sponsor, TRS, a wholly-owned subsidiary of the Company.
• Medalist Diversified Holdings, LP (the Company's operating partnership) provided a limited guaranty for the loan to MDRR XXV DST 1.
• The Company will serve as trust manager for the DST.

Stakeholder Impact

• Shareholders: Potential for improved liquidity for the parent REIT, Medalist Diversified REIT, Inc., through the cash received. Future private placement could lead to further capital infusion and a shift in accounting for the asset. The limited recourse nature of the loan protects the REIT from full liability under normal circumstances, but specific "bad boy" acts or bankruptcy events could trigger full recourse, impacting shareholder value.
• Investors in DST (future): Accredited investors will have the opportunity to acquire beneficial interests in the DST, potentially for 1031 exchange purposes, offering a structured real estate investment.
• Lender (Pinnacle Bank): Secured a $7.71 million loan with the Tesla Property and a limited guaranty from the operating partnership, providing a structured and protected lending arrangement.
• Tenant (Tesla, Inc.): The lease remains in effect, and the operational management by the Company as Trust Manager is expected to ensure continuity.

Next Steps

• The DST will offer beneficial interests to accredited investors in a private placement under Regulation D.
• The proceeds from the private placement will be used to redeem the Depositor's beneficial interests for cash.
• The Company will continue to control the Tesla Property's operations as the Trust Manager of the DST.
• The Company will continue consolidating the DST in its financial statements until it sells greater than 50% of the beneficial interests, then switch to the equity method.

Key Dates

Recommendation

The transaction is a strategic asset management move, providing liquidity and setting up a future capital raise through a DST. While it's a positive step for portfolio management, it doesn't fundamentally alter the company's core business or financial outlook in a way that would warrant a "buy" or "sell" recommendation based solely on this filing. The risks associated with the loan's recourse provisions are notable but standard for this type of structured financing. Investors should monitor the success of the private placement and the company's overall portfolio performance.

Keywords

REIT, Delaware Statutory Trust, DST, Tesla Property, Real Estate, SEC Filing, 8-K, Private Placement, Accredited Investors, Loan Agreement, Guaranty, Commercial Real Estate, Asset Sale, Financial Transaction, Medalist Diversified REIT