Cash and 1031 Proceeds Seeking Placement

April Land­scape Sum­ma­ry “Cash and 1031 Pro­ceeds Seek­ing Place­ment”

BY Al DiNi­co­la May 10, 2021

After an out­stand­ing begin­ning of 2021 with a report­ed $1.5B of equi­ty placed with DST spon­sors, some advi­sors felt as though the veloc­i­ty was left over from 2020.  2020 is so far in the rear-view mir­ror and now investors may won­der how to posi­tion their real estate assets for the future.  There are a few con­cerns for investors with regards to sell­ing their prop­er­ty espe­cial­ly when the task of locat­ing a replace­ment prop­er­ty seems over­whelm­ing.  The DST spon­sors are secur­ing addi­tion­al prop­er­ties to facil­i­tate what may be the biggest year in DST equi­ty invest­ment.  Based on an out­stand­ing first quar­ter and con­tin­ued invest­ment in April the indus­try may well move over the $4.25B equi­ty invest­ment mark. Con­sid­er­ing that most DST have a debt com­po­nent by design (aver­age of 50%) that would indi­cate $8.5B in DST pur­chas­es.  Moun­tain Dell Con­sult­ing reports the out­stand­ing suc­cess in a vari­ety of asset class­es.

• The top three equi­ty raised for Q1 2021 are: Mul­ti­fam­i­ly $600M (51.24%); Indus­tri­al $178 M (15.23%); Retail $166M (14.21%). Mul­ti fam­i­ly tends to lead the pack for a vari­ety of rea­sons.  MF has been the pre­ferred asset class and also has the largest sup­ply of prop­er­ties.  The Indus­tri­al sec­tor with the dis­tri­b­u­tion cen­ters is much sought after but there is lim­it­ed sup­ply.  The retail asset class con­sists of nec­es­sary retails gro­cery, neigh­bor­hood drug stores and larg­er prop­er­ties includ­ing kid­ney cen­ters and neigh­bor­hoods dis­count stores. 
• Mul­ti-man­u­fac­tured hous­ings asset class is a new sep­a­rate asset class (was split out from Mul­ti­fam­i­ly) and raised $60M.   Look for more insti­tu­tion­al mon­ey pur­chas­ing man­u­fac­tured home parks in south­ern states as long-term ‘mom and pop’ own­ers sell.  Self-stor­age con­tin­ued with a lim­it­ed num­ber of offer­ings and rais­ing $54M. Sur­pris­ing­ly, Office raised near­ly $50M.
• Office med­ical is start­ing to rebound with $31M.  The Mul­ti Senior Hous­ing $17M and Mul­ti Stu­dent Hous­ing $9M. All of these asset class­es were affect­ed more than oth­er with COVID.  Acces­si­bil­i­ty to due dili­gence as well as lim­it­ed new sup­ply on the mar­ket may be cor­rect­ed in the near future. One note on Stu­dent Hous­ing would be to mon­i­tor the increase in enroll­ment in col­leges as a return to nor­mal may boost enroll­ment.   
• These are all first quar­ter results.  2021 is shap­ing up to be a “fast and flu­id” year form the stand­point of equi­ty or cash being avail­able.  Cash from spon­sors to acquire prop­er­ties and pro­ceeds from 1031 investors and straight-out cash investors.

How­ev­er, there is an invest­ment ele­phant (or don­key) in the room.  As many investors under­stand there are dis­cus­sions on what Pres­i­dent Biden may or may not due with regards to rais­ing the nec­es­sary cap­i­tal to pay for his pro­grams.  Over the past years the 1031 tax deferred exchange (not a loop­hole) has been the sub­ject of mod­i­fi­ca­tion and even thoughts of elim­i­na­tion. Pres­i­dent Biden has also float­ed and pro­posed the idea of dou­bling the cap­i­tal gains tax, elim­i­nat­ing the step up in basis upon trans­fer upon death to the heirs as well as a few oth­er poten­tial elim­i­na­tions includ­ing rais­ing the top tax brack­et. Many of these pro­grams have a dol­lar amount of either gains, prof­its or oth­er exclu­sions for cer­tain income earn­ers.  Fam­i­ly busi­ness­es and farm­ers may also have spe­cial exemp­tions. We will con­tin­ue to write about these items in future arti­cles.  DSTs may pro­vide diver­si­fi­ca­tion and restruc­tur­ing of investor assets to fall under the pro­ject­ed dol­lar amounts. The good news are these unknows as well as how the red-hot real estate mar­kets in many parts of the coun­try are lead­ing prop­er­ty own­ers to become sell­ers.  The ratio­nale is to sell now, lock in prof­its, seek replace­ment prop­er­ties and hope­ful­ly be grand­fa­thered in on the cur­rent tax sit­u­a­tion.  DSTs are becom­ing the new alter­na­tives because of the tax favored returns as well as the turnkey solu­tion the pro­vide. Com­mer­cial real estate bro­kers are rec­om­mend­ing the DST as the replace­ment solu­tion for their sell­ers.  Com­mer­cial Real Estate bro­kers are not able to offer a DST unless they have the nec­es­sary qual­i­fi­ca­tion and secu­ri­ty license. Prop­er­ty own­ers are becom­ing sell­ers and there is a buy­er ready to close.  Investors should always con­sid­er their alter­na­tives and DST are not for all investors and you must be an accred­it­ed investor to pur­chase a DST.

Once a prop­er­ty own­er close on their prop­er­ty being sold and the qual­i­fied inter­me­di­ary is hold­ing the sales pro­ceeds then the “fast and furi­ous” 45 days starts to iden­ti­fy prop­er­ties. A strat­e­gy may be to have a con­ver­sa­tion with an invest­ment advis­er two to three weeks ahead of the clos­ing on the real estate being sold.  This could line up a poten­tial asset class and a few options to con­sid­er.  The DST are tracked sim­i­lar to real estate as Days on Mar­ket (DOM).  In 2020 the medi­an DOM was 164 days across all asset class­es.  In 2021 the medi­um DO is 75 days.  Nat­u­ral­ly cer­tain assets with small­er offer­ings (under $20M) may only last a week or so.  While oth­er larg­er offer­ings $150M may take longer to be sub­scribed. We, as advi­sors, track the DST offer­ings con­tin­u­ous can make rec­om­men­da­tion on poten­tial posi­tion, diver­si­fi­ca­tion, and geo­graph­ic loca­tions. We also bal­ance the nec­es­sary cash rein­vest­ment (being held by the QI) as well as secur­ing the bal­ance of debt (if applic­a­ble) as required by the 1031 deferred process.

April was an out­stand­ing month for DST invest­ment and as we move into May and the Sum­mer the key will be avail­able DST offer­ings to sat­is­fy the surge in demand from cash investors and 1031 Exchanges.

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.

Any infor­ma­tion pro­vid­ed has been pre­pared from sources deemed to be reli­able but is not guar­an­teed to be a com­plete sum­ma­ry or state­ment of all avail­able data nec­es­sary for mak­ing an invest­ment deci­sion. Past per­for­mance is not a guar­an­tee of future results. Price and yield are sub­ject to dai­ly change and as of the spec­i­fied date. Any infor­ma­tion pro­vid­ed is for infor­ma­tion­al pur­pos­es only and does not con­sti­tute a rec­om­men­da­tion. 

DST 1031 con­sult­ing advi­so­ry ser­vices may be offered through: NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC | 999 Van­der­bilt Beach Rd, Suite 200 | Naples, FL 34108.  Direct:  239–691-8098
www.NAMCOA.com  Firm Brochure (ADV2)

Secu­ri­ties may be offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC.  CRD #142927.  NAMCOA® and MSC-BD, LLC are Inde­pen­dent­ly owned and oper­at­ed.