February 2022- Frenzy Pace for DSTs and 1031 Continue in 2022!

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.