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By Al DiNicola, AIF® Feb 13, 2022
Behind the scenes the cost of acquisition in many regular real estate transactions are similar to DST. There may be finders’ fees for locating and negotiating properties acquired by the sponsor to be packaged as a DST. There may also be loan fees paid on the financing if there is a debt component on the DST acquisition.
What is a “load”? When an individual or investors purchase real estate there are cost that are added to the purchase price to come up with the total cost. This cost may be title insurance, inspection cost, fees for the loan that may be place on the property to purchase the property. Add to that potential escrow for insurance, taxes and other cost do add additional cost to the purchase. Many investors who regularly purchase real estate chalk these cost up to the normal course of acquiring a property. First time buyers of normal real estate are surprised at the additional out of pocket costs that add to the deposit or cash needed to close. DSTs also have additional cost but are packaged a little differently. There is a need for funding or capital to fund reserve accounts and other fees associated with the initial acquisition of the property that will be packages as a DST. All of these costs are considered a “load”. Over time regular real estate had a rule of thumb that you would need to hold your property for 5 years to break even to cover all your acquisition cost given what a typical appreciation may be on real estate. Covering your cost should be considered so that you have all your capital returned when the property/asset is sold at the end of the holding period. The more fees added to the acquisition price requires a higher sales price for the underlying assets owned by the DST. Investors should focus on not only a profit at the end of the terms but the preservation of the investment capital. Capital preservation would need to include selling for enough profit to cover the “load”. Owning real estate on your own also may require the hiring of a property manager who over sees the asset. One of the benefits for potential investors in a DST is the full disclosure of the fees associated with the acquisition of the cost. These are easily reviewable in the Private Placements Memorandum (PPM). All investors must receive and review the PPM prior to investing in a DST.
Look for Part 8: Limitations on a DST
DST’s (Delaware Statutory Trusts) are for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. 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 firstname.lastname@example.org.
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