By Al DiNicola, AIF®
July 18, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
Investor appetite continue.
Last month we focused on the expanding locations for Delaware Statutory Trust (DST). Investors are seeking out DSTs in a variety of locations. The pace of investing continues to place stress on ability of the sponsors to process and close the increase of equity being invested by cash investors as well as 1031 tax deferred investors. The Qualified Intermediaries (QIs) are also overwhelmed with the volume of 1031 exchanges since all 1031 exchanges need to have a QI not just DSTs. At times it is a challenge to accurately understand what equity is available and provide feedback to the individual investors. We track many of the sponsors available equity and have sponsors on speed dial. Time is a big challenge when attempting to assist the 1031 exchange investor. In the residential market there is a tracking mechanism residential agents use called “Days on Market” (DOM). In many locations throughout the US the DOM (prior to the increase in interest rates) was very short (sometimes multiple offers on the same day). In DST offerings equity becomes available when released by the sponsor. We may have a short period for due diligence review typically 5-7 days prior to release. In the record-breaking year of 2021, DST offerings, on average, equity would last 107 days (2020 was 200 days). Through the first half of 2022 offerings were available 58 days on average. This is based on feedback from sponsors reflecting on reports from Mountain Dell Consulting. As mentioned, we monitor the sponsor offerings and conduct due diligence on many offerings. Not all offerings are suitable for every investor as we evaluate the individual investors goals, objectives, risk profile and other investment experiences. This ensures the recommendations we make align with each individual investor.
Investor Readiness
Cash investors have the flexibility to move into an investment as soon as the cash investor makes the decision. Investors using a 1031 Exchange need to complete the sale of their relinquished property in order to have the funds to invest. We do receive calls from 1031 investors before the closing of their relinquished property and well before the investor’s 45-day identification period begins. The real challenge is assisting investors (who are utilizing a 1031 exchange) is when the investor has already entered into their 45-day identification period. The challenge is compounded by the educational process that is typically needed for first time DST investors and especially first time 1031 exchangers. We pride ourselves on providing exceptional educational information in a variety of materials. Our recommendation, given the average equity available is 58 days, would be to start your interaction with your representatives or Investment Advisor as soon as possible. The other dynamic would be an investor may have interest in an offering that was fully subscribed, or the investor was not ready to purchase when the offering was available.
Record Equity being Invested.
Earlier in this article we referenced 2021 as a record-breaking year. The dollars invested equity in DSTs topped $7.5 Billion. This number was more than 2019 and 2020 combined. As of the end of June 2022 (as reported by Mountain Dell Consulting) equity investment is sitting at $5.6 Billion. There are many reasons for the increase in equity. DST structure and function aligns with many investors who at their point in life are looking for passive income. The income is also tax advantaged and not correlated to the stock market. Investors who are exchangers (requiring debt replacement to comply with the IRS requirements on their exchange) receive non-recourse debt assignment. DSTs that include leverage by design are prepackages and do not require investors to apply for any loan not does the debt assignment appear on any investors credit reports.
Product availability.
DST availability is very fluid and changes day to day. Mountain Dell Consulting has provided a snapshot in time on the product diversification for a period of time being the beginning of July 2022.
- The number of sponsors has remained stable with 31 sponsors.
- There was a total of 54 offerings available during the reporting period.
- Multifamily which in the past has represented 50% of the offerings continues to be the leader.
- During the reporting period Multifamily represented 40% of the total offerings as well as 40% of the dollar volume.
- Industrial offerings while accounting for only 20% of the offerings but surprising 40% of the dollar volume. There has been an increase of interest in industrial distribution centers and this offering size tends to be a much larger offering.
- Necessary retail represented 18% of all offerings with 9% of the volume.
The limited performance of the rest of the asset classes may be due to the point in time when the snapshot of current offerings was taken. There were limited numbers of offerings in the manufactured housing, student housing, senior housing, self-storage and hospitality asset sectors.
While the numbers of product availability are encouraging there are always details within the offerings. Savvy cash investors are in the best position to take advantage of a new offering being released. 1031 exchange investors need to be proactive in the identification of potential replacement assets (occasionally referenced as programs or properties) prior to the start of their 45-day identification period. This also provides the financial advisor additional time to review options and suitability. As previously mentioned, the average equity was available was 58 days. However, certain assets will have a much shorter period of availability. On average the size of new offerings (in the snapshot) is around $47 million. Remember this is a snapshot in time and not reflective of actual results.
Product Performance
The numbers reflected in the Year-to-Date report (provided by Mountain Dell Consulting) invested equity reflects a much larger average offering size. There were 54 programs investing $5.6 Billion with and average asset size $109 Million. This may reflect larger assets offerings and potentially portfolios rather than smaller asset offerings. The larger the offering there is a potential for increased time the asset would be available. There has been much discussion on the cap rate compression (on the acquisition) when the sponsor acquires the property. As a reference, there is an inverse relationship between cap rates and purchase price. The lower the cap rate the higher the price. There may be additional pressure to increase rental rates thus increasing distributions. The bottom line may be that the acquisition cap rates may have a direct effect on projected distributions.
Projecting the final 2022 outcome
There continues to be a lot of enthusiasm for investments into Alternative Real Estate including DSTs. Where 2022 finishes up will be determined on a lot of factors.
- Can individual investors continue to sell their properties creating an opportunity to complete a 1031 tax deferred exchange.
- Cash investors will continue to seek non-correlated returns (from the stock market).
- Cash investors have other alternative real estate options that the 1031 exchange investors do not have.
- Can DST and Alternative Real Estate Sponsor continue to add products and offerings providing investors with opportunities.
Keep up with the answers to these questions and other topics on DSTNews.org
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
