DECEMBER 2021- MONTHLY LANDSCAPE COMMENTARY: Shaping up to be a Whirlwind End of 2021

Securities offered through MSC-BD, LLC

Many would agree 2021 has been an interesting combination of events from all aspects.  Dealing with COVID, Delta, Omicron on the health side of the equation to the supply chain issues compounded by the political positioning all effecting the mind of the public as well as the investors.  What an introduction and we are ready for the end of the year to come.  However, the end of the year will be jammed packed with a tremendous amount of equity seeking placement in a variety of asset classes, investment vehicles, not to mention getting positioned for 2022. A few months ago, we predicted the Delaware Statutory Trust (DST) equity investment may reach $5.5-$6B this year. With less than 30 days that number may likely be reached. The end of 2021 will also be the deadline for many sponsors representing investments in Opportunity Zone (OZ) specific offerings or Opportunity Zone Fund (OZF).  This provided special incentives to investors rolling over capital gains from a variety of investment into specific zip codes that were designated in the 2017 JOBS Act.  There is a large push for OZ funds to close by year end that will qualify for a step up in basis (10%) to be realized December 2026.  The other push creating a large amount of equity is created by investors coming out of current DSTs to roll over into another DST (or exercise other exit strategies). The roll over is referenced as going “Full Cycle”. The other event compounding the push to year end would be the new investors to DST (either cash investors or 1031 exchange investors) scrambling to close on their replacement properties by year end to have their sale and replacement happen within the same tax year.  

The interesting series of events over this past year (cause & effect) was created by the amount of DST offerings going full cycle. From an investment standpoint DSTs are a relatively new vehicle starting around 2004. The DSTs replaced the Tenants in Common (TICs) as the investment vehicle of choice that also qualifies for the 1031 tax deferred exchange. The DSTs are set up as long-term investments typically 7-10 years.  Over the past few years many DST were sold prior to the intended time period. Many DST preformed as intended creating a steady distribution and favorable returns upon sale.  (There were examples of investment not preforming as intended. Each investor should do their own research into specific investments and the associated risk of all real estate investments. DST are for accredited investors only). When the sponsor decides to sell the investment asset, notification is sent to the investors.  Each investor will receive the terms of the deal as well as what their specific distribution may be upon closing of the transaction. In addition, there will be provisions for the individual investor to indicate their elections as to handling of the proceeds of the sale. The individual investors will be entitled to simply take the cash proceeds. If the individual investor elects to take the cash the investor will be responsible for paying all applicable taxes that maybe due. This would include federal taxes on the gain of the current DST investment including any carry over gain from prior 1031 exchanges rolled into this investment. There may be state taxes due calculated on the applicable individual tax rates. There also will be a tax on the recaptured depreciation taken on the current asset as well as ay depreciation rolled into the current asset by the investor if a 1031 exchanged was utilized to get into the DST asset.

Each year more investors are drawn to this DST passive investment collecting their monthly distribution. Now many investors are enjoying the DST experience and upon the full cycle event (a sale of the DST asset) are continuing to indicate they would seek to move into another DST offered by the same sponsor or another sponsor.  Utilizing the same sponsor makes sense for investors based on the performance and familiarity of the sponsor.  We have assisted investors seeking out a different sponsor. The frequent reason for seeking out another sponsor focused on the new offering asset class or geographic location of the follow-on offering.  For example, if an investor was moving out of a multifamily offering with their current sponsor in Texas and their current sponsor did not have another multifamily offering in Texas or another geographical acceptable location that investor may seek another sponsor who has a multifamily offering in their desired geographical area.  Investors may also want to move to a different asset class. If coming out of a self-storage offering in South Carolina may have an interest in moving to an industrial offering in mid America or a student housing offering the Baton Rouge or Austin. Recently we also consulted with an investor (using us as verification or validation on their decision) to move forward with a particular DST.

So where does that leave the new investor seeking to invest in DST. Cash investors may be at an advantage since there is no real estate to be sold, waiting on a closing to create cash position (potentially using a 1031 exchange) to move into a DST. Where does that leave investors, contemplating selling their real estate and seeking to do a 1031 tax deferred exchange using a DST replacement? It starts with being pro active and seeking out education and advice from advisors who actively deal with DSTs on a daily basis.  Advisors should have access to strategies and plans for meeting or exceeding all the 1031 requirements.  Based on the offering size of the DST the offerings maybe available for 3-4 weeks. Over the past few weeks and projected until the end of the year, DST offerings will last a matter of days based on the amount of roll over equity positioned to reinvest. For new investors advisors who maintain an open line of communications with sponsors’ pipeline of offerings may be an advantage. Investors who are in their 45-day identification period (see November commentary for details) need to move quickly.

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 1031Tax 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@namcoa.com.

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.   NAMCOA, 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

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