July 2022 DST Monthly Landscape Commentary ~ Investors Responding to DST Availability with Brisk Pace    

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