DST Equity Investment continues with momentum into 2024.

Dur­ing 2023 equi­ty infu­sion into Delaware Statu­to­ry Trust (DST) has con­tin­ued.  Many investors uti­liz­ing §1031 tax deferred exchanges seized the oppor­tu­ni­ty to repur­pose their equi­ty. There were many more investors who were pre­vent­ed from exe­cut­ing a sale on their invest­ment or com­mer­cial real estate for a vari­ety of rea­sons. 

By Al DiNi­co­la, AIF®, CEPA ™
adinicola@namcoa.com
Decem­ber 16, 2023
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

Investors who were able to enter into a sale and clos­ing took advan­tage of a vari­ety of DST offer­ings includ­ing a vari­ety of asset class­es and geo­graph­i­cal loca­tion. There were many sig­nif­i­cant changes in the econ­o­my dur­ing 2023 that tem­pered the equi­ty infu­sion seen in the past two years (2021 & 2022).

Three imme­di­ate changes:

• Reduc­tion in LTV
• Longer Shelf Life of Offer­ings
• Few­er New Spon­sors

The per­for­mance of DSTs over the years may par­al­lel the com­mer­cial real estate mar­ket in some respects. When cap­i­tal for buy­ers is avail­able (in the form of financ­ing), at a rea­son­able inter­est rate, the real estate mar­ket heats up.  Occa­sion­al­ly the mar­ket heats up too much, affect­ing the amount of inven­to­ry (mean­ing lim­it­ed) or more buy­ers than sell­ers of cer­tain prop­er­ties. Dur­ing the past few years (before 2023) mul­ti­ple offers on real estate were received with some offers above ask­ing price were com­mon.  In addi­tion, many non-con­tin­gent con­tracts were sub­mit­ted.  COVID cre­at­ed an under sup­ply of DST assets.

Com­ing into 2023 the ris­ing inter­est rates cre­at­ed many of the issues for an over­all slow­ing of the com­mer­cial real estate mar­ket.

Going for­ward into 2024 the fun­da­men­tals are still strong on who is the poten­tial (typ­i­cal) DST investor. The investor may be seek­ing to remove them­selves from active man­age­ment of the real estate or even deal­ing with a prop­er­ty man­ag­er. The investor may have seen an appre­ci­a­tion of their prop­er­ty in a rel­a­tive­ly short peri­od of time.  Oth­er investors may have held the prop­er­ty for a long peri­od of time and have ful­ly depre­ci­at­ed the prop­er­ty and poten­tial­ly sit­ting on a large amount of cash equi­ty. We have seen oth­er investors (aka baby boomers) who seek alter­na­tive activ­i­ties oth­er than tak­ing care of their real estate. Gen­er­a­tional own­er­ship of invest­ment prop­er­ty may have also lost its glow. Recent sur­veys have indi­cat­ed that only 1/3 of heirs (sec­ond gen­er­a­tion) of busi­ness may actu­al­ly real­ly want to man­age the busi­ness, asset, or prop­er­ty.

Were the changes pos­i­tive or neg­a­tive?
The low­er loan to val­ue (LTV) result­ed in more spon­sors offer­ing all cash DST as well as lever­aged DST well under the 50% LTV.  This may be looked at as a more con­ser­v­a­tive under­writ­ing. It may also be cre­at­ed as a neces­si­ty since inter­est rates were ris­ing.  Bot­tom line more equi­ty needs to be raised and less debt need­ed.  For some investors this was not wel­come news.  Investors with a high­er required debt replace­ment may be scram­bling to find just the per­fect DST with the right LTV.

Longer shelf life has cre­at­ed more time for investors to review the alter­na­tives.  When DST inven­to­ry was tight (short sup­ply) investors may not have had the lux­u­ry to select sev­er­al alter­na­tives.  Now with DSTs being avail­able for a longer peri­od of time more analy­sis can be per­formed.  Suit­abil­i­ty and risk assess­ment may be the key for indi­vid­ual investors.

His­tor­i­cal­ly, when the DST Equi­ty mar­ket was expand­ing rapid­ly, this hot mar­ket enabled new untried real estate com­pa­nies to jump into the DST offer­ing mar­ket, to be a DST “Spon­sor”.   How­ev­er, in today’s DST mar­ket­place, “Less” can mean “More”, through the intrin­sic val­ue of addi­tion­al ben­e­fits for accred­it­ed investors.  To those with deep investor expe­ri­ence, we rec­og­nize that few­er new DST spon­sors launch­ing their first DST offer­ing can ben­e­fit investors in the long term.  It’s not an area for an ama­teur to serve in such a crit­i­cal role.  Spon­sors with a long track record of suc­cess­ful offer­ings are usu­al­ly an investor pref­er­ence. Sea­soned spon­sors who are well fund­ed with a sol­id under­stand­ing of the acqui­si­tion, pack­ag­ing, com­pli­ance, and dis­po­si­tion resources of the DST clear­ly is an advan­tage.  In addi­tion, sea­soned spon­sors know and under­stand the impor­tance of man­age­ment of the asset and the trust on a day-to-day basis.   All of these intrin­sic ele­ments can ben­e­fit the DST investor when it comes to the time for the asset to be sold.   

DST Advan­tages:
§1031 offer sig­nif­i­cant tax ben­e­fits for investors who want to defer cap­i­tal gains It appears that §1031continues to be an accept­ed part of the IRC and along with it the uti­liza­tion of DST as replace­ment prop­er­ty.

There are sev­er­al asset class­es or sec­tors of the real estate mar­ket that are resilient year over year.  Mul­ti­fam­i­ly, indus­tri­al, self-stor­age and net lease prop­er­ties appear to be per­form­ing well.  The DST offer­ings in these asset class­es may also pro­vide investors with geo­graph­ic diver­si­fi­ca­tion.  Gen­er­al real estate bro­kers may be lim­it­ed in the num­bers of alter­na­tives when com­pared to the DST alter­na­tive offered by finan­cial advi­sors.

The sub­ject of cash flow comes up often when com­par­ing reg­u­lar real estate to DSTs. When it is all said and done investors may real­ize a high­er cash flow dis­tri­b­u­tions than tra­di­tion­al real estate invest­ments. Espe­cial­ly if the investor is active­ly man­ag­ing the prop­er­ty. DSTs also have the poten­tial appre­ci­a­tion and depre­ci­a­tion ben­e­fits.

DST Dis­ad­van­tages:
DSTs may pos­si­bly (but unlike­ly) face reg­u­la­to­ry uncer­tain­ty, as the IRS may change the rules or inter­pre­ta­tions regard­ing the eli­gi­bil­i­ty and via­bil­i­ty of DSTs for 1031 exchanges.  Over the years §1031 have been the top­ic of dis­cus­sion regard­ing changes. How­ev­er, it may be unlike­ly this will hap­pen based on a num­ber of fac­tors.

Investors do not con­trol the DSTs. This results in lim­it­ed liq­uid­i­ty and exit options. The spon­sors deter­mine when the asset i.e. the DST is sold.  This could take sev­er­al years.  The pri­vate place­ment mem­o­ran­dum (PPM) lists this as one of the risks.

Investors need to under­stand the fees and com­mis­sion that are asso­ci­at­ed with the DSTs The PPM pro­vides full trans­paren­cy regard­ing fees and com­mis­sion. How­ev­er, the spon­sor has full author­i­ty over the trust and man­age­ment oper­a­tions.

We encour­age a deep dive into the advan­tages and dis­ad­van­tages of DSTs both for cash investors as well as 1031 exchange investors. We con­duct due dili­gence review of many of the major sponsor’s DST offer­ings.

Final Thoughts and com­ments:
We antic­i­pate the amount of equi­ty to be invest­ed in DST by the end of 2023 to reach near $5.6-$6B this is less than 2022. In 2024 even though inter­est rates may not come down much the invest­ed equi­ty could be as high as $7B. The under­ly­ing fac­tors are encour­ag­ing as real estate investor move to a more pas­sive role. The polit­i­cal land­scape in 2024 will be inter­est­ing to mon­i­tor and its effect on the over­all mar­kets.

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.