Underlying Fundamentals Continue to Drive Consumption of DSTs

DST Month­ly Land­scape Com­men­tary

March 15, 2022

By Al DiNi­co­la, AIF®

DST 1031 Spe­cial­ist

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC

Secu­ri­ties offered through MSC-BD, LLC

Encour­ag­ing DST Activ­i­ty

Reports on the investor appetite of Delaware Statu­to­ry Trust (DSTs) are extreme­ly encour­ag­ing. This con­tin­ues to val­i­date the struc­ture and func­tion of the secu­ri­tized real estate offer­ings known as DST. Accord­ing to Robert A. Stanger & Co., secu­ri­tized 1031 exchange Delaware Statu­to­ry Trust offer­ings have raised $1.7B through Feb­ru­ary 2022. It may be too ear­ly in the year to pre­dict if 2022 will sur­pass 2021. DST invest­ments had a record set­ting year of $7.4 Bil­lion in 2021. How­ev­er, if the pace con­tin­ues, we could see over $9B in equi­ty move into DST assets. Sec­tion 1031 of the Inter­nal Rev­enue Code allows investors to defer pay­ing cap­i­tal gains tax­es on invest­ment prop­er­ty sales by rein­vest­ing the pro­ceeds into a sim­i­lar invest­ment prop­er­ty with­in a spec­i­fied time frame. Secu­ri­tized 1031 exchange pro­grams are struc­tured as secu­ri­ties and sold to retail investors, main­ly as DST offer­ings.

Many of the demo­graph­ic shifts we have wit­nessed in the nation may have been blamed on the COVID effect.

Mean­ing life is too short, which prompt­ed peo­ple to change liv­ing envi­ron­ments. Hous­ing trends have seen a migra­tion to the south­ern states. There are many rea­sons for mov­ing. Peo­ple may be look­ing to change jobs, pro­vide a dif­fer­ent fam­i­ly envi­ron­ment and work remote­ly. There are also many land­lords who have “retired”. Mean­ing the land­lords (many small investors) who have sim­ply man­aged their prop­er­ties long enough and are seek­ing a sim­pler invest­ment. When you are the own­er of a sin­gle rental prop­er­ty or mul­ti­ple prop­er­ties, it can be reward­ing finan­cial­ly. Nat­u­ral­ly, there is a lot of respon­si­bil­i­ty attached with the own­er­ship. COVID may have added to the stress of own­ing and man­ag­ing rental prop­er­ties. The retir­ing land­lords are seek­ing a method to avoid or defer tax­es on the sale of their prop­er­ty. How­ev­er, the land­lord may want to tran­si­tion being an investor with a stream of income on a reg­u­lar basis. DSTs are for accred­it­ed investors and pro­vide an easy tran­si­tion (through a 1031 exchange) to pool resources with oth­er investors.

“Cash investors” as well as the retir­ing land­lords may share a few of the same ben­e­fits of a DST.

Rel­a­tive­ly speak­ing, DSTs have a much low­er dol­lar amount for invest­ing than tra­di­tion­al real estate rental prop­er­ty. Mean­ing a min­i­mal cost of entry, with no debt expo­sure.

Accred­it­ed investors typ­i­cal­ly invest $100,000 (cash or 1031 pro­ceeds) into the DST offer­ings. The struc­ture of the DST elim­i­nates all the stress of tak­ing care of the prop­er­ty or deal­ing with a prop­er­ty man­ag­er.

The typ­i­cal small­er investor may nev­er be able to buy invest­ment grade real estate. The struc­ture of the DST pro­vides for small­er investors to par­tic­i­pate in much larg­er prop­er­ties or port­fo­lios of prop­er­ties.

The Red-Hot real estate mar­ket also prompt­ed real estate investors doing a 1031, to uti­lize a DST as a back­up. This may be used in the event their oth­er iden­ti­fied prop­er­ties fell out of con­tract or expe­ri­enced oth­er com­pli­ca­tion. Investors like the DST being prepack­aged, scal­able to almost any dol­lar amount and with non-recourse debt. One of the require­ments to com­plete a 1031 exchange is to replace the debt being paid off with the sale of the relin­quished prop­er­ty. The red-hot real estate mar­ket is also a rea­son for the cur­rent land­lords to think seri­ous­ly about sell­ing now.

Investors may also seek diver­si­fi­ca­tion from sell­ing one asset to pur­chas­ing sev­er­al DSTs in dif­fer­ent class­es and geo­graph­i­cal loca­tions.

As DST advi­sors, we need to be cur­rent with spon­sor offer­ings. With the amount of equi­ty being invest­ed Spon­sors are busy secur­ing future offer­ing some­time ref­er­enced as the “pipeline of offer­ings”. Mul­ti­ple times a week we are in con­tact with the spon­sors not only to eval­u­ate new offer­ings but the obtain the sta­tus of cur­rent offer­ings to eval­u­ate prop­er align­ment with investors pro­files, risks and needs. The cur­rent month­ly equi­ty being invest­ed has been over $800 mil­lion. The same amount is com­ing on the mar­ket which requires us to con­stant­ly review new oppor­tu­ni­ties.

Vis­it DST News to obtain an overview of cur­rent­ly avail­able DST 1031 land­scape.

We recent­ly par­tic­i­pat­ed in a three-day due dili­gence and risk man­age­ment DST con­fer­ence, host­ed by the nation’s lead­ing DST spon­sors. This enabled us to speak not only with the DST spon­sors of alter­na­tive invest­ments but with the third-par­ty ana­lyst firms who iden­ti­fy strength and con­cerns with offer­ing struc­ture. This enables us to judge the mer­its of the offer­ings to align the prop­er asset with spe­cif­ic investors needs and goals.

If you are a 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. If you are already with­in your 45-day iden­ti­fi­ca­tion peri­od, your clock is tick­ing, and you may iden­ti­fy NOW as well as CLOSE quick­ly. As a side note, the quick­er you close on your DST replace­ment prop­er­ty, the soon­er the 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.

Thank you,

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC