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 15^th.  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 15^th 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.