June 2022 DST Monthly Landscape Commentary

DSTs Becom­ing Avail­able in More States and Loca­tions   

By Al DiNi­co­la, AIF®

June 15, 2022

DST 1031 Spe­cial­ist

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC

Secu­ri­ties offered through MSC-BD, LLC

Spon­sors Focus on Qual­i­ty Real Estate in a vari­ety of loca­tions.

Com­mer­cial real estate is all around us vir­tu­al­ly in every state and region of the coun­try. Like­wise, Delaware Statu­to­ry Trust (DSTs) may also be locat­ed any­where to the sur­prise of investors. Over the past three years and espe­cial­ly in 2021 ($7.6 Bil­lion invest­ed) both cash investors and 1031 tax deferred exchang­er have invest­ed bil­lions into a vari­ety of DST offer­ings. Investors will ask many ques­tions that include “Where is the best loca­tion or best state for invest­ment into a DST”. Invest­ing into com­mer­cial real estate or DSTs with­in the US gen­er­al­ly avoids any of the issues asso­ci­at­ed when you com­pare invest­ing in out of the coun­try. When­ev­er an investor moves to off­shore invest­ing you have all the typ­i­cal risks of real estate but include oth­er risk. With off­shore invest­ments you may expe­ri­ence polit­i­cal risks, civ­il unrest, or the threat of los­ing your prop­er­ty for oth­er unseen rea­sons. The same real estate fun­da­men­tals for com­mer­cial real estate need to be present for a DST when being eval­u­at­ed by a DST Spon­sor. We track many of the major DST spon­sors’ offer­ing details which include geo­graph­ic loca­tion in addi­tion to struc­ture and func­tion of the asset. Our Land­scape Sum­ma­ry (found on DSTNews.org) is designed to reflect cur­rent (or as accu­rate as pos­si­ble) the diver­si­fi­ca­tion of the geo­graph­i­cal (state) loca­tions. There are oth­er ele­ments that reflect our review of DST offer­ings includ­ing avail­abil­i­ty by sec­tor type. This track­ing may be very flu­id as DST offer­ings come on the mar­ket for investors and then when ful­ly sub­scribed tak­en off the Land­scape Sum­ma­ry. On any giv­en week there may be $100,000,000 swing of offer­ings.

Eval­u­at­ing Cri­te­ria.

When we review the Alter­na­tive Invest­ment offer­ings (includ­ing DSTs), we will review the Pri­vate Place­ment Mem­o­ran­dum (PPM) as well as oth­er Alter­na­tive Invest­ment Indus­try sum­maries and third-par­ty reviews of the offer­ings. One of the inter­est­ing items to dis­cov­er (from our office in Naples Flori­da) is the phys­i­cal loca­tion of the DST. Hav­ing a back­ground in com­mer­cial real estate (mul­ti­ple decades) and being a mem­ber of CCIM (Cer­ti­fied Com­mer­cial Invest­ment Mem­ber) helps us under­stand and eval­u­ate the over­all com­mer­cial real estate struc­ture. This is espe­cial­ly true when read­ing reports on the major mar­kets and loca­tions. What is always fas­ci­nat­ing is review­ing an offer­ing are the sec­ondary or ter­tiary mar­ket that check all the box­es required by the spon­sor for offer­ings a DST. Loca­tions in Iowa, Ida­ho, Michi­gan, and oth­er states may not be on the radar of investors. How­ev­er, if the invest­ing cri­te­ria can be under­writ­ten with favor­able acqui­si­tion terms that may lead to fur­ther due dili­gence. Each asset class may have a few sim­i­lar cri­te­ria for under­writ­ing and then spe­cif­ic cri­te­ria for final acqui­si­tion, pack­ag­ing and final offer­ing as a DST to indi­vid­ual investors. Investors may be cash investors look­ing for non-cor­re­lat­ed pas­sive real estate invest­ment or investors exe­cut­ing a 1031 tax deferred exchange.

Objec­tives & Risk.

Pri­or to an investor mov­ing into a spe­cif­ic invest­ment many cri­te­ria will be reviewed. Objec­tives and risk will be described in the PPM as well as port­fo­lio infor­ma­tion, invest­ment strat­e­gy, dis­tri­b­u­tion & exit strat­e­gy, the inclu­sion or absence of lever­age of the pur­chase as well as any unique fea­tures of the asset or prop­er­ty.

Cur­rent­ly in our Land­scape Sum­mery there are 16 dif­fer­ent indi­vid­ual states with DST offer­ings with 20% of the offer­ings in mul­ti­ple states.

The assets locat­ed in indi­vid­ual states may be eas­i­er to under­stand and poten­tial­ly small­er offer­ings. Grant­ed there are dif­fer­ences in the indi­vid­ual US state reg­u­la­tions (such as the absence of a per­son­al income tax) that may lead an investor to search for cer­tain geo­graph­i­cal loca­tions for their invest­ment dol­lars. As a note there cur­rent­ly eight states with no state income tax. Cur­rent­ly Alas­ka, Flori­da, Neva­da, South Dako­ta, Ten­nessee, Texas and Wyoming levy no state income tax at all. Wash­ing­ton state levies an income tax on invest­ment income and cap­i­tal gains but only for cer­tain high earn­ers. New Hamp­shire will be phas­ing out state income tax­es start­ing in 2023. By 2027 there will be nine states with­out a per­son­al state income tax.

Port­fo­lios may also be offered as a viable invest­ment strat­e­gy.

Cer­tain spon­sor focus on estab­lish­ing a port­fo­lio that may include a small num­ber of indi­vid­ual prop­er­ties in one state or 18–20 indi­vid­ual prop­er­ties across 8–10 states. This port­fo­lio of assets may be a com­bi­na­tion of nec­es­sary retail, health­care, and oth­er prop­er­ties. The diver­si­fi­ca­tion of asset spread across mul­ti­ple mar­ket­places may pro­vide a safe­ty net of sorts when there may be eco­nom­ic down­turns. In these larg­er port­fo­lios many times the under­ly­ing ten­ants are nation­al cred­it rat­ed ten­ants. This may pro­vide some com­fort to the investors but not a guar­an­tee.

Unique Fea­tures.

There are unique fea­tures (on each asset class) that will lead to the cre­at­ing the fun­da­men­tals of a great prop­er­ty. For exam­ple, indus­tri­al offer­ings may have a long-term lease (an absolute net lease) in place that may be for 20 years. As men­tioned pre­vi­ous­ly, the under­ly­ing ten­ant may have a cor­po­rate cred­it rat­ing. Many of the new­er built indus­tri­al facil­i­ties may have state of the art tech­nol­o­gy built out inside. The phys­i­cal loca­tion may be in a desir­able sub­mar­ket with grow­ing trans­porta­tion access. The Met­ro­pol­i­tan Sta­tis­ti­cal Area (MSA) may be grow­ing and may have a tal­ent­ed, edu­cat­ed work­force near­by mak­ing it an ide­al loca­tion for nation­al and region­al head­quar­ters of many com­pa­nies.

Acqui­si­tion Prices.

Recent­ly the mul­ti­fam­i­ly space has seen an increase of acqui­si­tion price as well as cap rate com­pres­sion. This effects the poten­tial dis­tri­b­u­tion rate. Spon­sors are still able to locate most­ly indi­vid­ual prop­er­ties but occa­sion­al­ly port­fo­lios of mul­ti­fam­i­ly offer­ing. Many prop­er­ties project strong rental growth over the next two years and then a nor­mal rent growth. The strength of the job mar­ket adds to the via­bil­i­ty of the mul­ti­fam­i­ly asset. The only rea­son for over­look­ing jobs as a major com­po­nent may be in sun belt areas where there is an influx of retirees. How­ev­er, retirees do require many ser­vices that will require an employ­ment base. The strong apart­ment mar­ket analy­sis may be an impor­tant eval­u­a­tion. There is still a nation-wide short­age of hous­ing unit cal­cu­lat­ed to be around 4 mil­lion units.

Of note would be not every loca­tion in the coun­try have the same hous­ing require­ments. Texas, Neva­da, Flori­da, Ten­nessee, and oth­ers are see­ing migra­tion into the states while oth­ers may be los­ing res­i­dents. I will leave the report­ing for states not need­ing an increase of hous­ing (because of out of state migra­tions) to oth­er report­ing sources. Suf­fice to say that large cor­po­rate relo­ca­tions as well as baby boomers sell­ing and mov­ing to warmer cli­mates cre­ate demand.

Recent­ly we reviewed offer­ings in Kansas, Okla­homa, Ari­zona, New Jer­sey, and even Cal­i­for­nia. As stat­ed pre­vi­ous­ly if the under­writ­ing by spon­sors can check all the box­es for the invest­ment com­mit­tee a DST may appear near­ly any­where. Investors are do con­sid­er and invest in states that have a per­son­al income tax. This inter­est becomes appeal­ing when investors take into con­sid­er­a­tion the poten­tial tax advan­taged income pro­vid­ed as well as poten­tial tax con­sid­er­a­tion with depre­ci­a­tion and oth­er asset posi­tion­ing.

Some Finan­cial Advi­sors rec­om­mend the use DSTs as an alter­na­tive invest­ment in a client’s port­fo­lio for a few rea­sons.

• First, due to their low cor­re­la­tion to the stock mar­ket, mean­ing when the “mar­ket” goes down, the real estate asset ignores the fluc­tu­a­tions in price.
• Sec­ond­ly, cash is invest­ed for the income and cap­i­tal appre­ci­a­tion poten­tial of the asset itself. There is noth­ing like month­ly rental income and pos­i­tive impacts of infla­tion on a port­fo­lio!
• Last­ly, it’s impor­tant to point out that oth­er asset types rere­c­om­mend­ed by Finan­cial Advi­sors do not have the 1031 tax ben­e­fits found in a DST. Any port­fo­lio, with the excep­tion of a vari­able annu­ity, you have to pay cap­i­tal gains tax­es as you rebal­ance, not so with a DST.

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