Expanded DST Equity Providing Investors with Additional Options.

Feb­ru­ary 2023-The amount of Delaware Statu­to­ry Trust (DST) equi­ty offer­ings that was in the pipeline in the lat­er part of 2022 was intend­ed to pro­vide advan­tages for investors.  Once the acqui­si­tion wheels were put in motion mid 2022 all the spon­sors need­ed to do was to acquire the prop­er­ty or asset, per­form the due dili­gence, cre­ate the Pri­vate Place­ment Mem­o­ran­dum and offer the prop­er­ties to DST investors. 

Feb­ru­ary 2023- MONTHLY LANDSCAPE COMMENTARY

By Al DiNi­co­la, AIF®, CEPA™
March 22, 2023
Adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

The flur­ry of addi­tion­al  prop­er­ties brought to the mar­ket were intend­ed to solve the avail­abil­i­ty issues that plague many 1031 tax deferred exchanges as well as the cash investors seek­ing pas­sive income and no man­age­ment respon­si­bil­i­ties. One of the main fea­tures of DST own­er­ship is the pas­sive income cou­pled with the void of man­age­ment respon­si­bil­i­ties which aligned with many investors over the past few years.  It appears that trend will con­tin­ue with the expec­ta­tion of investors who have active­ly man­aged their prop­er­ties for many years who are seek­ing to remove them­selves from the bur­den and oth­er poten­tial prob­lems.

Spon­sors did in fact solve the inven­to­ry issues that sti­fled investor options dur­ing most of 2022. Actu­al­ly, the inven­to­ry gap start­ed in the 4^th quar­ter of 2021 and con­tin­ued into 2022. Now investors have found some breath­ing room or escape from the urgency cre­at­ed by a lack of inven­to­ry or the need to iden­ti­fy some­thing (unfor­tu­nate­ly any­thing) to pre­serve the 1031 tax deferred exchange exe­cu­tion. The ben­e­fit was not only increased inven­to­ry but also addi­tion­al loan to val­ue per­cent­ages or what is known as lever­age com­po­nent.

Let’s focus on inven­to­ry. 

There is a report­ed $3.5 Bil­lion of equi­ty or inven­to­ry that is being offered by spon­sors through rep­re­sen­ta­tives and advi­sors. Rep­re­sen­ta­tives and advi­sors review the pro­grams and offer­ings and deter­mine suit­abil­i­ty for indi­vid­ual investors. (We on aver­age review two to three offer­ings each week). Indi­vid­ual investors have dif­fer­ent risk assess­ments as well as asset class inter­est and not all DST offer­ings are for each and every investor. Mul­ti­fam­i­ly offer­ings con­tin­ue to dom­i­nate the avail­able equi­ty but to a small­er per­cent­age than in past years.  In past years Mul­ti­fam­i­ly offer­ings would com­prise 55–58% of the avail­able equi­ty. Dur­ing an equi­ty snap­shot at the end of Feb­ru­ary mul­ti­fam­i­ly made up only 43% of the offer­ings. What caused the dou­ble dig­it drop from past years? Poten­tial­ly the increase in indus­tri­al offer­ings. Indus­tri­al now rep­re­sents 20% of the offer­ings.  The oth­er fac­tor may be the increase in office offer­ings. We have seen some spe­cial­ized office offer­ings that may not be the tra­di­tion­al office but rather a spe­cial­ized envi­ron­ment of office.  High­ly trained tech­ni­cal and med­ical relat­ed call cen­ters are becom­ing more preva­lent as we enter a dif­fer­ent style of office.  There has also been a slight uptick in the retail offer­ings that typ­i­cal­ly are con­sid­ered nec­es­sary retail. Self-stor­age con­tin­ues to attract investors, but the offer­ings have been lim­it­ed going in to 2023. Stu­dent hous­ing looks promis­ing based on ear­ly fall 2023 lease ups. Hos­pi­tal­i­ty has reen­tered the are­na and with most­ly all cash offer­ings.

Past per­for­mance

The lack of inven­to­ry at the end of 2021 cre­at­ed pent up demand mov­ing into 2022.  Based on our expe­ri­ence the first quar­ter of many years have been qui­et with regards to DST invest­ment via 1031 exchange. The log­i­cal rea­son may point to investors fin­ish­ing their pre­vi­ous year tax­es and then hav­ing a dis­cus­sion with their CPA. This dis­cus­sion often focus­es on poten­tial tax effi­cien­cy. Aside from tax effi­cien­cy some CPA will review the depre­ci­a­tion sched­ules of the real estate owned by the investor. Togeth­er the investor and the CPA may deter­mine there needs to be an asset realign­ment so to speak.  This realign­ment may be sell­ing one prop­er­ty that is ful­ly depre­ci­at­ed and strate­gi­cal­ly acquir­ing oth­er real estate. Investors who have owned prop­er­ties for many years which may have been ful­ly depre­ci­at­ed  could ben­e­fit in sell­ing those prop­er­ties and repo­si­tion­ing with a DST asset. The investor may reset their poten­tial tax effi­cient posi­tion all over again.

Bal­anc­ing Act

Over the past twelve months there has been a shift in the offer­ing struc­ture with regards to lever­age. The under­writ­ing cri­te­ria has shift­ed with respect to the loan to val­ue (LTV) ratio. There are two forces work­ing against each oth­er at times.  Spon­sors are deal­ing with the increase in financ­ing cost as inter­est rates rise. This prompts spon­sors to reduce the LTV below 50% and in many cas­es in the 20% to 40% range. Nat­u­ral­ly there will be more equi­ty need­ed to bal­ance the pur­chase. The move to a more con­ser­v­a­tive under­writ­ing (with regards to LTV) may cre­ate pres­sure and anx­i­ety for investors who need to replace debt to sat­is­fy the 1031 exchange.  There is a require­ment to replace debt being paid off on the sale of the down-leg with new debt or addi­tion­al cash. The “Down Leg” is referred to as the prop­er­ty that is being sold and qual­i­fy­ing for the 1031 exchange.  The “Up Leg” is the prop­er­ty that is being acquired or the replace­ment prop­er­ty.  An investor com­ing out of an exchange with a high­er LTV cre­ates a chal­lenge for the investor and the finan­cial advi­sor. There is also a large increase in the num­ber of all cash DST (no debt) that have come to mar­ket.

Good news and chal­leng­ing news

Increased inven­to­ry is good news for investors.  Investors as long as they iden­ti­fy pri­or to the expi­ra­tion of the 45-day noti­fi­ca­tion peri­od may enjoy addi­tion­al time to review doc­u­ments and take a deep­er dive into the alter­na­tives.  Investors may have two to three times the num­ber of spe­cif­ic alter­na­tives than a year ago. So, what is the chal­lenge? The chal­lenge would be to bal­ance the debt replace­ment for those investors who need debt replace­ment.  The few DSTs that have an LTV above 50% LTV have become very pop­u­lar for cer­tain investors. The goal for meet­ing debt replace­ment and suit­abil­i­ty for investors is always a con­cern.  Recent­ly we assist­ed an investor faced with this chal­lenge.  As a rec­om­men­da­tion we posi­tioned the investor with a suit­able zero DST (no direct dis­tri­b­u­tion) that had a high LTV. This rec­om­men­da­tion enabled the investor to invest in an all-cash DST as well as a low LTV DST. The blend­ing of the zero DST, all cash DST and a DST with a lever­aged DST enables us to bal­ance the exchange. As a ref­er­ence a zero DST does not pay direct dis­tri­b­u­tions to investors and uses those dis­tri­b­u­tions to pay down the loan on the prop­er­ty. The oth­er chal­leng­ing issues (which may be viewed as an oppor­tu­ni­ty) is the diver­si­fi­ca­tion of assets with more selec­tions. DSTs by design have a low bar­ri­er to entry typ­i­cal­ly $100,000.  An investor engaged with a $500,000 exchange may acquire 4–5 DSTs (under the cor­rect guid­ance) cre­at­ing a diver­si­fied port­fo­lio of dif­fer­ent asset class­es as well as geo­graph­i­cal loca­tion.

Equi­ty activ­i­ty

Cer­tain spon­sors are report­ing activ­i­ty bet­ter than pre pan­dem­ic lev­els so far in 2023. Albeit less than the 2021 and 2022 fran­tic activ­i­ty.  At the end of Feb­ru­ary equi­ty invest­ed almost reached  $1B. As not­ed pre­vi­ous­ly the begin­ning of the year tends to be slow­er than third and fourth quar­ters typ­i­cal­ly. A new asset class (sub­set of mul­ti­fam­i­ly) has entered the offer­ing stack. The Built for Rent (BFR) asset class has start­ed to gain pop­u­lar­i­ty.  Think of this as a hor­i­zon­tal apart­ment with detached sin­gle sto­ry dwelling units with small­er square footage than detached homes. There are lim­it­ed offer­ings at this time but be aware of more offer­ings in the future. The oth­er under­ly­ing fac­tor is the hous­ing unit deficit. We are still fac­ing a hous­ing deficit of 4 mil­lion liv­ing units.  Mul­ti fam­i­ly devel­op­ment will con­tin­ue.  The chal­lenge is to locate the right prop­er­ty for you, the investor. Call to review your spe­cif­ic needs.

Crys­tal Ball for bal­ance of 2023

What is the equi­ty that may be invest­ed in the bal­ance of 2023? We see the under­ly­ing moti­va­tion of cer­tain investors still the same as in the past five years.  Sea­soned investors are mov­ing out of active man­age­ment and into pas­sive income vehi­cles.  Investors are seek­ing non-cor­re­lat­ed invest­ments with respect to the  stock and bond mar­ket.  Sea­soned investors are seek­ing less volatil­i­ty in their invest­ments.

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. 8215 SW Tualatin- Sher­wood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

SOCIAL MEDIA

Social Media plat­forms are sole­ly for infor­ma­tion­al pur­pos­es. Advi­so­ry ser­vices are only offered to clients or prospec­tive clients where the advi­so­ry firm and its rep­re­sen­ta­tives are prop­er­ly licensed or exempt from licen­sure. Past per­for­mance is no guar­an­tee of future returns. Invest­ing involves risk and pos­si­ble loss of prin­ci­pal cap­i­tal. No advice may be ren­dered by NAMCOA unless a client ser­vice agree­ment is in place.

Thank you.