Investors continue to seek DSTs via Cash & 1031

Al DiNi­co­la

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 adinicola@dst.investments.

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