August 2022 DST Monthly Landscape Commentary
By Al DiNicola, AIF®
August 15, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
End of year investor planning has started.
We have seen the Delaware Statutory Trust Offerings (DST) continue to be brought to the market. The continued availability of DSTs provides investors the ability to rebalance their portfolios. Investors are actively evaluating their portfolio positions for any year end repositioning. Cash investors may consider moving out of equities (stocks) and into real estate. The tax advantages utilizing passive income provided with a DST investment vehicle appeals to investors seeking a non-correlated asset to the stock market. Current real estate investors (especially those who actively manage their properties) may be considering selling and utilizing a 1031 tax deferred exchange prior to the end of the year. Certain commercial real estate assets are still attractive to new investors in spite of the rising interest rates. Investors planning on selling their real estate may have enough time to list, contract, and close on their current real estate by year end. Given traditional commercial real estate marketing and sales cycle, meaning a 30-day listing period, 45 days under contract period and closing, a property listed in August may close by end of November. We have taken a phone call from a real estate investor in the process of selling their commercial real estate holdings. Based on their feedback locating a replacement property to satisfy the requirements of the 1031 exchange are becoming more difficult.
Investors Selling their real estate may have Concerns
There are many concerns investors may have when offering and selling their investment real estate. Typical concerns may include how close to the asking price the investor can expect, how long will it take to get under contract, how long to close after contract, and what are my proceeds. The follow-on questions will include establishing the capital gains on the proceeds, and the capital gains taxes that need to be paid. There is the recapture of depreciation that may results in additional capital gains. Investors utilizing a 1031 tax deferred exchange will also need to focus on the financial aspects and critical timing requirements of the exchange. Many investors are seeking a move from active management of their real estate to passive management. The sooner the investor who is selling their real estate establishes a replacement strategy the better. A recent call from an investor with their property under contract closing in 30 days provides ample time for education on alternative investments including a DST. We have also taken calls from investors with limited time remaining in the 45-day identification period. These investors (some with less than a week in the identification period) have shared with us they have been looking for months for replacement properties with no success. This may be a result of multiple offers on the replacement properties or debt replacement impediments created by rising interest rates. These effects investors doing an exchange where there is a replacement of debt requirement imposed by the 1031 exchange process. Whenever there is an increase in interest rates there also is a decrease in affordability. The result may decrease the debt coverage service. Debt coverage is a metric some lenders use for loan qualification. There are also the investor guarantees on the loans required by many lenders. All cash exchange investors will have an advantage but also face challenges. Inspection delays on identified replacement properties may create other challenges. At the end of the 45-day identification period, the list submitted to the Qualified Intermediary (QI) may not be changed or properties substituted.
Sponsors continue to provide options.
DST sponsors continue to supply a variety of asset classes including multifamily properties for investors. This supply coming on the market at times create many options that need to be evaluated for the right suitability for the individual investor. The rise in interest rates have prompted sponsors to consider reducing the Loan to Value (LTV) on properties being acquired, packaged, and then offered as a DST solution. Some investors may view this reduction as being more conservative in nature. Just as multifamily properties are coming on the market there are properties being fully subscribes (sold out) and some in record time. The overall housing deficit may be a cause for the continued need for multifamily properties. Some experts estimate the US is experiencing a need for additional housing stock of 4 million units. Units meaning apartments, single family, or other types of residential living units. Job growth and migration creates many of the demands for housing.
There has been a noted increase in two asset class offerings recently. Hospitality and Senior Housing offerings have become more available, but not to the scale of multifamily. The hospitality offerings have been all cash offerings without leverage. This appeals to cash investors who may view DSTs with leverage as a riskier investment. There are also 1031 exchange investors who don’t require debt replacement who would consider all cash hospitality sector offerings or other all cash offerings. Some CPAs may suggest cash investors consider debt (non-recourse to DST investors) that increases the overall purchase price creating an increase in basis and potentially increasing tax write-offs. The Senior Housing offerings were all cash and recently there has been a few offerings with lower LTV.
To Sell or Not to Sell- That is the Question.
We have spoken with investors who had no intention of offering their real estate holdings for sale but find themselves entertaining offers for sale. At the same time, we have investors who actively offer their real estate properties for sale by listing with a competent commercial real estate broker. Investors will evaluate the condition of their current real estate holdings as well as future capital expenditures that may be needed to maintain their property. Investors may seek to lock in profits and be able to move to an alternative real estate investment portfolio. The decision on moving into a DST may also center on the passive nature of the asset. Recently we assisted an investor selling a single asset consisting of an apartment building (requiring active management) into a portfolio of six (6) DSTs that were geographically diversified as well as asset class diversified. This included the balancing of sales proceeds of $3.2 million and a debt replacement of $2.8M.
Many of the conversations we have with investors who are considering selling their real estate will be focused on the acquisition process of the DST replacement properties. Investors will compare the DST acquisition process to finding traditional real estate replacement properties. The traditional replacement includes negotiating contracts, handling inspections, and all the other necessary task to comply with the 1031 tax deferred exchange requirements. Many investors are surprised to learn that the DST acquisition process is easier than acquiring traditional real estate. Advisors who are actively engaged with DST sponsors can quicky evaluate an investor risk profile, (utilizing Regulations BI) and suggest the right investment replacement options or a portfolio of replacement properties.
The Clock is Ticking
As each week goes by millions of dollars of DSTs are acquired by cash investors and 1031 exchange investors. Now is the time to examine your overall portfolios that include your real estate holdings. If you have exhausted your depreciation schedule for write offs or of you are seeking to move from active management to passive management, seek professional advice on the potential sale of your traditional real estate. If a DST may be in your future, consider increasing your knowledge of the overall 1031 process and how DST investments may provide multiple advantages for you.
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 firstname.lastname@example.org.
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.
NAMCOA® – Naples Asset Management Company®, LLC