December  2022 DST Monthly Landscape Commentary  ~ 2022 Year End DST Crunch

By Al DiNi­co­la, AIF®
Decem­ber 15, 2022
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

Decem­ber DST clos­ing Stress­ful or Stress Free

When we reach the end of the year there are a mul­ti­tude of events and per­son­al tasks on our list. The list may include fam­i­ly events, busi­ness and hol­i­day par­ties as well as all the last-minute shop­ping. Cash investors and espe­cial­ly the 1031 tax deferred exchange investor may be feel­ing the stress of acquir­ing a Delaware Statu­to­ry Trust (DST). This may be as a direct cash invest­ment or as the replace­ment prop­er­ty for a 1031 exchange. Investors may want to tie up and close on invest­ments pri­or to the end of the year. Some CPAs find it an advan­tage for the 1031 exchange investor to have the sale of the relin­quished prop­er­ty fall with­in the same tax report­ing peri­od. What­ev­er the case there are many fac­tors that can lead to a stress­ful end of 2022 as well as a few strate­gies to relieve the pres­sure and ring in 2023.

Iden­ti­fy­ing options

One of the strate­gies for reliev­ing the stress for the 1031 investor would be to have alter­na­tive options on your replace­ment prop­er­ties. We have writ­ten oth­er arti­cles on the tim­ing for iden­ti­fy­ing replace­ment prop­er­ties. Suf­fice to say if you are with­in your 45-day win­dow the clock is tick­ing. A finan­cial advi­sor who spe­cial­izes in DST prop­er­ties should be able to sug­gest sev­er­al alter­na­tives depend­ing on your indi­vid­ual risk pro­file. DST prop­er­ties include all the same com­mer­cial asset class­es with a secu­ri­ties wrap­per so to speak. Replace­ment options may be mul­ti­fam­i­ly, stu­dent hous­ings, senior hous­ings, man­u­fac­tured hous­ings, indus­tri­al, self-stor­age, life sci­ence, hos­pi­tal­i­ty, nec­es­sary retail, or med­ical office. At any giv­en time, there may be a vari­ety of options avail­able depend­ing on the geo­graph­ic loca­tion that may be of inter­est to the indi­vid­ual investor. On your list a big sug­ges­tion would be to have a few back­ups as cer­tain DST maybe ful­ly sub­scribed quick­er than oth­er.

Port­fo­lio Struc­ture

One strat­e­gy that may work for cer­tain investors is to approach the 1031 require­ments on replac­ing the total price would be to look at more than one DST prop­er­ty. This works well if your tar­get replace­ment prop­er­ty is more than the typ­i­cal min­i­mum required by the DST which is $100,000. If the val­ue of your relin­quished prop­er­ty was $1M (with or with­out debt being paid off) there may be advan­tages to acquir­ing two or three DST. This is one advan­tage of the 1031 exchange enabling an investor to acquire more than one prop­er­ty. We have been for­tu­nate to work with investors who are open to review­ing a port­fo­lio of DST that would be com­prised of dif­fer­ent asset class­es (for exam­ple mul­ti­fam­i­ly & self-stor­age) as well as dif­fer­ent geo­graph­i­cal loca­tions (for exam­ple Texas & Geor­gia). There are also DST that are struc­tured as a diver­si­fied port­fo­lio. For exam­ple, there may be a nec­es­sary retail port­fo­lio of prop­er­ties that is made up of 18 loca­tions in 9 dif­fer­ent states.

“All Cash” Advan­tage vs. “In cash” Advan­tage

There is a dif­fer­ence between All Cash & In Cash. All cash investors are sit­ting on cash ready to invest. These investors are not uti­liz­ing a 1031 exchange and may invest in a vari­ety of DST regard­less if the DST is an all-cash DST (with no debt) or a DST that has lever­age (non-recourse debt). The ref­er­ence to “In Cash” means the investor is uti­liz­ing a 1031 exchange and the Qual­i­fied Inter­me­di­ary (QI) has the pro­ceeds from the sale of the relin­quished prop­er­ty. This is one of the manda­to­ry IRS require­ments, mean­ing the QI has the cash, to suc­cess­ful­ly uti­lize a 1031 exchange.

Replac­ing Debt May be a Chal­lenge

Over the past year we have writ­ten about the struc­tures of the DST reduc­ing the LTV on prop­er­ties that car­ry debt. The IRS require­ment to replace the debt paid off on the relin­quished prop­er­ty may becom­ing a lit­tle more dif­fi­cult. DST spon­sors are look­ing to reduce risk by reduc­ing the amount bor­rowed on the ini­tial acqui­si­tion of the prop­er­ty that will be offered as a DST. This has been prompt­ed by the increase in bor­row­ing rates. For 1031 investors who paid off a high­ly lever­aged relin­quished prop­er­ty there are sev­er­al suc­cess­ful strate­gies we have sug­gest­ed. This strat­e­gy may include a high­ly lever­aged DST with anoth­er DST that cre­at­ed a blend that sat­is­fies the over­all debt replace­ment require­ments.

Qual­i­fied Inter­me­di­aries (QI) case load

We com­mu­ni­cate with many QI through­out the coun­try. Once Decem­ber arrives many Qis know their work will pile up because of the yearend tar­get for clos­ings. This year-end tar­get may be a psy­cho­log­i­cal issue or real issue. QIs han­dle all types of 1031 exchanges includ­ing DSTs. The com­mu­ni­ca­tion between the Finan­cial advi­sors, the DST spon­sor and the QI is crit­i­cal for a quick suc­cess­ful clos­ing. There are a num­ber of acknowl­edge­ments that need to be in place. The Finan­cial advi­sor needs to ensure that all email com­mu­ni­ca­tions flow clear­ly and all doc­u­ments that require sig­na­tures are process­es. Many QIs and spon­sors are on top of their game regard­ing clos­ing. The indi­vid­ual investors need to respond when ask for sig­na­tures and ini­tials on all mate­ri­als. If the investor is uti­liz­ing a trust the trustees need to be stand­ing by for all sig­na­tures that are required.

Get the funds wired and close the trans­ac­tion

There are a few extra steps that may be required when it comes time for the wire to be sent. There will be a spe­cif­ic set of wire instruc­tion sent from the spon­sor to the QI. The QI may require addi­tion­al ver­i­fi­ca­tions to avoid any type of poten­tial prob­lems. The advan­tage DST have over oth­er tra­di­tion­al real estate is the amount of paper­work at the end appears to be less than tra­di­tion­al real estate. There is a caveat to the sug­ges­tion that the paper­work if less than tra­di­tion­al paper­work. All DST investors must receive the Pri­vate Place­ment Mem­o­ran­dum (PPM) pri­or to any clos­ing on a DST.

Final Thought and a Word of Cau­tion

Tax­pay­ers after clos­ing on a Relin­quished (old) Prop­er­ty typ­i­cal­ly have 45 days to iden­ti­fy new prop­er­ty. Under nor­mal time frame they have 180 days to com­plete the pur­chase for a suc­cess­ful 1031 Exchange. If you have closed on the relin­quished prop­er­ty from Mid-Octo­ber through the end of the year, the time­line to com­plete the exchange is short­ened.

Often over­looked is Sec­tion 1031 (a)(3)(B) which short­ens the exchange peri­od. The investor must close by April 17, 2023. This poten­tial­ly would be before the assumed 180-day peri­od. The tax­pay­er must file a tax exten­sion for their entire tax return to get the full 180 days peri­od.

Keep up with oth­er top­ics on 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. 1719 NW Edgar Street, McMin­nville, OR 97128 MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.
Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC