July Landscape Summary “Commercial Real Estate Synergy Driving DST”

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 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.