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
