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