DST Offerings Enable Investors to Plan Year End Strategies     

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
https://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