IRS 1031 Deferred Exchange extension expires with sell out and funding of many DST offerings.

DST Investments, LLC

Securities offered through MSC-BD

The COVID extension of the IRS 45-day identification period as well as the 180-day closing time period has expired on July 15th.  The extension was provided considering the virus that affected the ability to inspect properties and conduct necessary adherence to certain contract provision. Some lenders may have pulled back on funding for buyers of the 1031 disposed properties. Other real estate investments (under contract) have seen some concerns for occupancy  and income generation required by lenders.

Weekly we track the equity that is available for investment into DSTs from the major DST sponsors.  This includes both all cash DSTs and leveraged DST. The results from the past month (with the expiration of the July 15th date) has seen an investment of nearly $200 MM of equity into a DST. This does not include investments in other alternative real estate investments (Opportunity Zone Funds, REITs, etc.).  Alternative Real Estate investment may still provide financial solutions for investors seeking non 1031 exchange solutions.

Sector allocation followed the tradition investment path with multifamily holding the top position with acquisition by individual investors.  Many sponsors are reporting strong, consistent rent collections. Multi family provides over 50% of the offerings and investment.

Student housing sponsors (making up about 10% of the offerings) also are reporting additional rental applications and signed leases in certain location. On the surface when we think about student housing with relation to colleges potentially operating online courses rather than in person, we wonder why anyone would be near campus. Students are not returning to their parents’ home and the students want to be near the colleges even if taking online classes. Colleges already started to de-densify the dorms as we mentioned in last months’ article.  Basically, eliminating the four-bedroom two bath dorms and having bedroom/bathroom parity (meaning a bathroom for each bedroom) resulting in students, in some cases 40%, being forced out of the dorms.  In addition, with colleges offering online courses many of the dorms may not open.  Thus, leaving new freshmen who traditionally are on campus to seek off campus housing.  This is causing an uptick in private housing leases being signed.

The retail sector that contains the core businesses with essential services performed well through COVID. Some of the offerings are well diversified in geographic locations.  Self-storage seems to be performing well including single location facilities and multiple location offerings.  There are limited industrial offerings and seeing brisk acquisition by investors.  Bottom line, many offerings were funded within the last month. Whether there was a backlog or normal investor acquisition there is a demand and need for additional DST offerings.

The question to answer may be what will happen the balance of the year?  Sponsors have been in engaged in due diligence (with the COVID restriction) to provide assets for acquisition for investors for strategic planning.  COVID restricted the physical inspections, appraisal and other necessary due diligence required to prepare an asset to be acquired by the sponsor that would be offered to investors. Sponsors obtaining assets and getting those assets in the pipeline will enable individual investors selling their real estate (through a 1031) and potentially closing on that real estate by year end to complete the 1031 exchange.  The interest rates are favorable for both purchasers of investors’ assets (qualifying for the 1031 exchange process) as well as the sponsors of DST obtaining favorable loans for the leveraged assets. As a reminder a DST with leverage (loans) are non-recourse to the individual investors.  Sponsors are working diligently to have assets or properties on the market by mid to late September for the typical year end closing targets.  There may also be an inverse relationship between investors seeking a specific asset class.  For example, if there is a limited supply of “all cash DSTs”, industrial or self-storage those opportunities may be subscribed quicker.  The multi family assets while in great demand also have the greatest supply. As a side note an “all cash investors” do acquire leveraged DST for the same reasons why a buyer would purchase real estate using a down payment and a mortgage (which may require the buyers to guarantee the loan).  The buyer would control a more expensive property with a potential greater overall appreciation.  With the exception a DST does not have any investor recourse as in the case of a buyer obtaining a mortgage.

Investors who can properly prepare their current investment real estate property for sale and close by end of year may have an advantage in acquiring a DST replacement property utilizing a 1031 exchange. An IRS 1031 tax deferred exchange is an exchange of like kind investment properties, which enable taxable gains to be deferred on the property that is sold. There are specific time constraints on the identification periods and closing on the replacement property. DST provide an alternative for diversification and are scalable for what ever amount is needed for the replacement property as well as satisfying the debt replacement is needed.

All real estate acquisition and ownership are not without investment risks. Remember that all investments carry risk and investing in real estate and DST properties also carries risk. There may be declining market values, liquidity issues and interruption to potential cash flow. Investors need to seek advice with their CPAs and other professional for guidance and advice.

For more information on how to properly set up an IRC 1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098.

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