May 2023 Landscape Review

Equi­ty Invest­ed in DSTs Inch­es For­ward

Investors con­tin­ue to secure equi­ty in Delaware Statu­to­ry Trust (DSTs) albeit at a slow­er pace than in recent years. The over­all com­mer­cial real estate slow­down may affect the con­tin­ued slow­ing of DST equi­ty invest­ment.

By Al DiNi­co­la, AIF®, CEPA™
June 5, 2023
Adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD

Most DST offer­ings are used by investors when enter­ing into a §1031 tax deferred exchange. Moun­tain Dell Con­sult­ing con­sol­i­dates results from most of the DST spon­sors on a week­ly and month­ly basis. Through May 2023 Moun­tain Dell Con­sult­ing reports DST equi­ty invest­ment was just over $2.1 Bil­lion. If the same month­ly pace con­tin­ues, the 2023 end of year may reach over $5 Bil­lion. The pace of equi­ty invest­ment may be direct­ly tied to the com­mer­cial and invest­ment real estate mar­ket and how many investor uti­lize §1031 exchanges into the DST space.

There is always a work of cau­tion when com­par­ing past year DST equi­ty invest­ment. Each year is a dif­fer­ent finan­cial cli­mate. Pri­or to COVID there was equi­ty invest­ment but not in com­par­i­son to the most recent past years of 2021 and 2022.  Like oth­er indus­tries under­stand­ing what a typ­i­cal norm for equi­ty invest­ment in the DST space may be help­ful. We are not mak­ing excus­es but sim­ply pro­vid­ing an obser­va­tion. COVID may have been the spring­board for many investors to decide to sell their invest­ment prop­er­ties (a few years ear­li­er than antic­i­pat­ed) and move into a DST. Here is a five (5) year equi­ty overview.

Demo­graph­ics in Play

The under­ly­ing demo­graph­ics have not changed regard­ing the investors seek­ing to sell their active­ly man­aged real estate and move into a pas­sive­ly man­aged prop­er­ty with pas­sive income. What is evi­dent is the effect of the rise in inter­est rates cre­at­ing a com­pres­sion of over­all net oper­at­ing income for a lever­aged real estate invest­ment.  If there is addi­tion­al mon­ey need­ed for debt ser­vice (cre­at­ed by the rise in inter­est rates) then investors will pause in acquir­ing the real estate of investors seek­ing to move into a DST.  Cap rate analy­sis is a dif­fer­ent num­ber because cap rates are a func­tion of NOI pri­or to debt ser­vice as a method to val­ue the prop­er­ty. Investor hold­ing assets will not eas­i­ly reduce their ask­ing or sell­ing price as they are anx­ious­ly wait­ing for inter­est rates to sta­bi­lize. 

Inter­est rates are affect­ing the DST mar­ket as well. 

With the rise in inter­est rates spon­sors are seek­ing all cash DST acqui­si­tions or low­er loan to val­ue acqui­si­tion which ulti­mate­ly requires addi­tion­al equi­ty.  All cash DST work very well for some cash investors uti­liz­ing a §1031 exchange. Some all-cash investors will seek tak­ing on the non-recourse debt that DST offers in order to increase the basis in the invest­ment thus pro­vid­ing tax advan­taged income.  Investors who need debt are faced with few­er DST offer­ing any debt over a con­ser­v­a­tive lev­el of say 50%.  This cre­ates an issue with sat­is­fy­ing the 1031 exchange require­ments of replac­ing. Debt.  Sev­er­al zero-coupon DST (offer­ing high LTV and no annu­al income) are ide­al for off­set­ting the debt require­ments. Mul­ti­fam­i­ly rep­re­sents over 40% of the offer­ings and Indus­tri­al is at 20%. Oth­er asset class­es have lim­it­ed offer­ings how­ev­er, nec­es­sary retail con­tin­ues to gain mar­ket share.  Well posi­tioned prop­er­ties with good fun­da­men­tals con­tin­ue to appeal to the investors in a posi­tion to con­vert their cur­rent active­ly man­aged prop­er­ties into a pas­sive invest­ment prop­er­ty.

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.

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