Feb 5, 2021
January 2021 continued where December 2020 ended. Investors continued to identify, select, and close on Delaware Statutory Trust (DST) assets provided by Sponsor in all sectors. The end of December did see (as predicted) a flurry of activity to get replacement properties closed as required by the 1031 tax deferred exchange as well as cash investments. This is typical year end activity. However, the activity continued into January. We experienced a tremendous amount of cooperation on the part of the Qualified Intermediaries with the care and time commitment to close all the transactions investors wanted to close by year end. Our interaction with sponsors via phone, webinar and zoom meetings focused on how to properly position investors and align the investors needs with the proper asset selection and allocation. There was also another focus by the investor and that may be the utilization of the 1031 exchange prior to any potential change or elimination of the program by the Biden Administration. We will address this aspect here and in other upcoming posts.
Sponsors also closed on the acquisition of the new assets prior to yearend and then continued the arduous work to get the assets in a position to offer to investors. Many of these new DST offerings came on the market in January. The current Landscape Summary on DST News.Org https://dstnews.org/ identifies over $500,000,000 of potential DST properties from the major sponsors. There also continues to be a constant movement of what is available on a daily basis. The challenge for both the investors as well as financial advisors assisting the investors may be securing the assets prior to another investor executing the subscription agreement. The other challenge is understanding the required paperwork needed to comply with the acquisition. The investors who had the advantage were those cash investors (not using a 1031 exchange) or those 1031 investors who already closed on their property they were selling, meaning their Qualified Intermediaries (QI) already had the proceeds from the sold property. Occasionally this position may be referenced to “being in cash”. Sponsors understand that if there is a cash investor or exchange investor who is “in cash” are in the best position to secure a position in an offering.
The required paperwork typically is comprised of the sponsor’s Prospect Questioner (PQ) and then a purchase agreement or subscription agreement. The PQ identifies the Investors overall qualification meaning the investors is an Accredited Investor and understands the risk associated with any investment or real estate investment. The purchase agreement or subscription agreement outlines the purchase of the asset. There is also a Private Placement Memorandum (PPM) that must be delivered to all investors. In most cases all these are delivered electronically for ease of delivery as well as retention by investors. In addition, the financial advisors or broker dealer representatives also have internal disclosures and paperwork that is required by either the SEC or FINRA. Both the SEC as well as FINRA want to ensure the adviser or representative know their customer or investor and comply with the requirements. The other requirement is a third part verification of the investors accredited investors status.
The real challenge facing investors and those investors who may be under contract with the property they are selling and anticipating a closing in the future is the selection process. If the closing on their property is within a few weeks, financial advisers can assist in identifying the specific replacement assets. If the closing on the property is not near term and out 45-60 days, the asset class may be identified but not the specific asset. Typically, there are multiple Multifamily assets available since this asset class is the majority of offerings. Other asset classes such as industrial or self-storage may be limited simply because there are fewer options.
There is a sense of urgency created by the supply and demand of DST assets. In a typical brick & mortar 1031 exchange there may be a longer time period between the sale of the property and the acquisition of the replacement property. The 45-day identification period does not change, and this creates another stumbling block with a brick and mortar exchange. The IRS provides a total of 180 days to complete the 1031 exchange. The Qi will hold the investors funds until the closing. The urgency or demand created by certain DST actually assist the investors with their turn around deployment of their proceeds or capital. Rather than the proceeds (cash) sitting in the QI account the investor can rapidly deploy their proceeds into a DST and start receiving the projected distribution. Typically, DST pay monthly distributions via direct deposit. Investors enjoy the ease of closings and the “mailbox money”.
We are awaiting the new administration’s plans for the country. There has been speculation that Mr. Biden’s plans include some changes to the 1031 tax deferred exchange. There are studies that point to the negative effect of the elimination of the 1031 tax deferred exchange. The 1031 tax differed exchange has been in effect for over 100 years and created to assist property owners with differing taxes until actual profits are taken on their investments. The discussion on the elimination of the 1031 occurs every few years. When these discussions come up investors seek to execute an exchange with the expectation their exchange may be executed and not subjected to any new regulation. At this time, we don’t know what will happen although many state and local agencies are reviewing the lost revenue that will result if the 1031 is eliminated as a selling strategy for investors. State & local agencies typically receive proceeds from the sale of real estate in the form of higher taxes as well as increased spending on new property acquisition by buyers. There was a study completed by Ernst & Young in 2015 that reference as still being valid today on the effects of elimination of the 1031 exchange. http://www.1031taxreform.com/wp-content/uploads/EY-Report-for-LKE-Coalition-on-macroeconomic-impact-of-repealing-LKE-rules-revised-2015-11-18.pdf
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. 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 or email firstname.lastname@example.org.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. DST Investments, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041