MONTHLY LANDSCAPE COMMENTARY
DST Education & Timing May be the Key!
By Al DiNicola, NAMCOA, RIA
February 15, 2022
Securities offered through MSC-BD, LLC
The numbers have been on the books for over a month of the frenzy end of 2021. Activity continued in January 2022. Commercial and multifamily sales combined reached a record $808.7 Billion last year according to Real Capital Analytics. This was well ahead of pre pandemic levels. The previous high-water mark was $600 Billion. It is too early in the year to predict if 2022 will surpass 2021 in Delaware Statutory Trust (DST) investment record setting year of $7.4 Billion.
However, January did see an enormous amount of DST subscription agreement that converted into equity purchases. This may have been as a result of brick & mortar properties being closed at year end and investors entering their 45-day identification period starting January 1, 2022. In previous articles and commentary, we have opined on the ability to close quickly on identified DST assets well before the total 180-day IRS requirements to successfully perform a 1031 tax deferred exchange. The quicker the closing on the replacement property the quicker investor capital is put to work that may result in quicker returns.
Demographics continue to be another important driver behind 1031 exchanges with the aging baby boomers.
Boomers (and investors) who may have been actively involved in the management of their properties are opting to purchase DSTs. This may be because of the elimination of property management requirements. One sponsor reported the average age of their investors is between 70-72 years of age. These baby boomers are selling their properties as they transition to retirement or semiretirement. One industry expert state, “we are in the retires market, and they are looking for yield”. The increase in equity flowing into alternative investments continue to be based on demographics. Baby boomers are not only looking to exit actively managed properties but transition to more passive investments and potentially fixed income assets. The often-used phrase “mailbox money” may still be relevant today.
The commercial real estate market has been very active in many parts of the country. Many markets are reporting new highs in all asset classes and property types. According to Capital Analytics “CPPI National All Property Index for December 2021 jumped 22.9 percent year over year for all property types. Industrial saw the biggest one-year change with prices rising 29.2 percent, followed by multi-family at 23.6percent”.
Investment into DSTs will continue as the 20-year education process continues. This education process is with financial advisors first as well as CPAs. Financial Advisors at times may guide their clients on alternative maneuvers of their portfolios. This may be especially true for investors seeking non-correlated returns. CPAs may have direct knowledge to real estate holdings. Properties that are fully depreciated (thus not taking tax advantaged depreciation). These properties may be sold and reposition the proceeds to another real estate investment. This may reset the clock on the loans, increases basis (if a more expensive property is acquired). This may provide some taxable benefits. DSTs may be the perfect solution.
The main driver for a majority of the DST investors may be the stability of cash flow.
There are sectors that have the ability to maintain high levels of occupancy. This results in a good opportunity to generate year over year rent growth. Especially during the five-to-seven-year anticipated hold time periods. What are those sectors? In recent years those have been multifamily and industrial. Over the past few years multifamily has spun off a few other sectors. Student Housing has bounced back in some locations. Manufactured Housing, as well as Senior Housing are some of the offerings. The newest sector within multifamily is the build for rent single family rental communities. These are purpose built rental communities that offer rental home. Some of the offerings offer community amenities with pools, clubhouses, and fitness centers. Self-storage has continued to be in high demand with sponsors being able to offer portfolios of storage facilities offering geographic diversification.
So where does a potential cash investor or 1031 investor start?
It all starts with education on the advantages of a DST and knowing your time restraints. DSTs are not for everyone. Recently I met with two investors about the same age. One wanted to actively manage their real estate portfolio which may be a nonstarter. The other simply wanted to enjoy their real estate investment without worrying about property management.
What has become apparent is the need for continued monitoring of the availability of DST offerings.
We track most of the major sponsors of DST offerings. Keeping up to date on the remaining equity across all asset classes is critical. Investing in continuing education for ourselves offered by third party due diligence companies is a key. This enables us to judge the merits of the offerings to align the proper asset with specific investors needs and goals. Cash investor you have immediate access to availability. If you are contemplating a 1031 exchange with a DST as a potential alternative or even a backup now is the time to educate yourself. For investors already within your 45-day identification period, your clock is ticking, and you may identify NOW as well as CLOSE quickly. As stated previously, the quicker you close on your DST replacement property the sooner potential distribution may be sent to you.
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. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
