By Al DiNicola August 10, 2021
Velocity Continues! The acquisition of assets by sponsors and the ultimate investment by individuals in DST offerings continues with increased velocity. 2021 will end up as a record year and may top $5.5 Billion in equity invested into Delaware Statutory Trust (DST). Using a 50% LTV that represents over $10 Billion in securitized real estate acquisition. Let’s take a step back and look at the drivers of this trend.
The commercial real estate environment in many parts of the US can be credited being the underlying driver. Looking backwards, real estate values in most markets have recovered since 2008. This combined with low interest rates has led to an active market. Real Estate brokers and agents have responded to the needs of the sellers. Sellers seek to lock in gains and buyers are eager to secure new properties. Real estate is being listed by sellers who have discovered an easier exit strategy that we will touch on a little later. The buyers in the commercial marketplace are comprised of the typical individual buyers and the larger buyers including large real estate funds as wells as DST Sponsors. Demographic trends are fueling demand for turnkey passive ownership. As the population ages passive ownership demands increase. One popular trend is the desire to minimize property management responsibilities. So, what else may be driving this unprecedented velocity of today’s market? It may include the 1031 tax deferred exchange popularity. This strategy enables a seller to defer (not eliminate) capital gains into the future. The status of the 1031 exchange has been a topic of discussion ever since Mr. Biden became president. The question remains, will the 1031 program still be available next year. Look for a side bar a little later.
Sellers of commercial real estate assets have been faced with a challenge when attempting to sell their property and utilize a 1031 exchange. The challenge is finding quality replacement properties that not only meet their needs but also satisfy the requirements of the 1031 tax deferred exchange. Real estate brokers are also faced with the perplexing challenge to locate potential properties within the 45-day identification period, negotiate a contract, finalize inspection, arrange financing for the seller, and then keep their fingers crossed nothing falls out between the end of the 45-day identification period and the closing of the property. If anything falls out then the entire 1031 exchange implodes and the seller may be faced with a large capital gains tax to be paid. There is no fall back plan. This may be a reason certain sellers could be reluctant to even list their property for sale. In other words, what is the exit plan? Remember Steven R Covey’s “Start with the end in mind”. The other question from real estate investors focusses on the proceeds of their sale (referenced as the “down leg”) and how long it may take to deploy proceeds into another investment generating an income stream. If there is a time delay between selling the first property and closing on the replacement property, (the “up leg”) the funds are sitting in the QI’s account. Still other questions come up from investors may be what if I don’t use all my proceeds. If a seller closes on the down leg he is selling at $2M and has a great replacement property, aka up leg, for $1.7MM the investor pays capital gains on the balance of $250K (called “Boot”).
DSTs creates the exit for Seller. One of our investors who has owned investment real estate for nearly 40 years summed up the DST exit strategy as “the easy button”. While it may be easy for the investor there is a lot of research that goes on behind the scenes. Weekly, we are in contact with sponsors on equity availability (that is what the investor uses their cash proceeds from their down leg to acquire the DST). In addition, we are balancing the portfolios of potential investors to meet the purchase criteria. Tracking availability of DST on a weekly basis provides a quick overview on our spreadsheets, especially when we receive a frantic call from an investor who has 2 days remaining in their 45-day identification period. The other item we balance is the debt replacement requirements of the exchange if necessary (debt needs to be replaced if there was a mortgage or loan paid off on the sold property). Combine those activities with sellers who need smaller amounts of a DST to satisfy potential Boot amounts to totally defer capital gains taxes keeps us on our toes. The worksheets we utilize can balance the equity and debt requirements to the penny. One of the last acquisitions by an investor was $352,996.54. Basically, the amount the QI was holding in the investor’s account. Also, we are creating a list of future DST availability for sellers who will be closing within the next few months. Our relationship with the major sponsors enables us to understand potential assets that maybe available within the next 60 days.
AS PROMISED HERE IS THE SIDEBAR on 1031 Exchange Potential Changes. Recently there have been studies completed by a coalition of companies that work within the 1031 industry as well as others. The 1031 Like-Kind Exchange Coalition includes the following members: Alternative & Direct Investment, Securities Association, American Land Title Association, Federation of Exchange Accommodators, International Council of Shopping Centers, Institute for Portfolio Alternatives, Mortgage Bankers Assn, NAIOP, the Commercial Real Estate Development Association, National Association of Home Builders, Nareit, National Apartment Association, National Association of REALTORS®, National Multifamily Housing Council, and The Real Estate Roundtable. One of the studies was completed by EY, formerly known as Ernst & Young Global Limited. We can supply copies of the full study, but the results are very interesting. The estimated revenue from Mr. Biden’s plan over ten years with the elimination of the 1031 would generate $1.9 billion. Over the same period because of the elimination of the 1031 exchange the lost tax revenue would be $19.55 Billion. This includes the elimination of 568,000 jobs, $27.5 billion in total labor resulting in $55.3 billion in total value added supported by like kind exchanges. In another article BRADLEY TISDAHL stated President Biden’s “1031 Exchange Proposal Fails the Math Test.
The DST Sponsors continue to acquire properties that will be available to handle what could be a very exciting and fast paced end of 2021 especially if there are changes in the 1031 program starting in 2021. As always please let us know if we can answer any questions regarding tour 1031 exchange or DST acquisition. We will continue to be on top of our game and respond as quickly as we can to your questions.
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 email@example.com.
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
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