DST.EDU Series B- Asset Classification Discussion Introduction

Editor’s note- this is Part One of a ten-part series on the var­i­ous asset types of DST offer­ings.

At times there may be dif­fi­cul­ty in con­nect­ing the terms or words Delaware Statu­to­ry Trust (DST) to the under­ly­ing asset that may com­prise the invest­ment port­fo­lio. Is an “Asset Class” dif­fer­ent than a “Prop­er­ty”? 

Part 1: Asset Overview.

Wel­come DST News! Our goal is to pro­vide non-biased edu­ca­tion and mar­ket infor­ma­tion for
Accred­it­ed Investors on DSTs.

April 2, 2024

Orig­i­nal­ly post­ed May 5, 2022

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

At times the words may be used inter­change­ably. In the world of invest­ing real estate may be known as an alter­na­tive invest­ment when com­pared to stocks or bonds. Part of the con­fu­sion may be typ­i­cal real estate clas­si­fi­ca­tion of com­mer­cial or res­i­den­tial. Asset call may ref­er­ence a grad­ing code such as A, B, C, D.  DST Assets are the same as com­mer­cial asset clas­si­fi­ca­tion. Part of the dis­con­nect may be with the words “trust” and then when you lay­er in “Delaware” and the word “Statu­to­ry” it evokes an auro­ra of con­fu­sion sort­ing through the struc­ture. DSTs are con­sid­ered secu­ri­tized invest­ment vehi­cles so the words asset may become more descrip­tive. 

Twen­ty Year Accep­tance
The DST struc­ture (now over 20 years of exis­tence) start­ed around 2003 when an invest­ment real estate com­pa­ny from Chica­go (name avail­able upon request) peti­tioned the IRS to cre­ate anoth­er struc­ture of frac­tion­al own­er­ship oth­er than the Ten­ants in Com­mon (TIC). Indi­vid­ual investors may not be in a posi­tion to pur­chase large real estate prop­er­ties. The inten­tion of the peti­tion was to cre­ate a struc­ture that may lim­it the finan­cial expo­sure for the indi­vid­ual investors. There are many dif­fer­ences between the TIC struc­ture and the DST struc­ture. TIC struc­ture has investors per­son­al­ly respon­si­ble for any debt asso­ci­at­ed with the real estate. The DST struc­ture is ref­er­enced as “non-recourse” debt to the investor. The oth­er com­po­nent of the DST is an increase in the num­ber of poten­tial investors from thir­ty-five to a larg­er num­ber.  A larg­er num­ber of investors increas­es the amount of poten­tial fund­ing. In a TIC envi­ron­ment to pur­chase a $35 Mil­lion asset each investor would need to con­tribute $1 mil­lion each. With an expand­ed investor pool, the DST spon­sor may have the abil­i­ty to raise the same $35 Mil­lion but offer­ing would include many more investors at a low­er invest­ment thresh­old. Low­er thresh­old may lim­it indi­vid­ual investor expo­sure. A low­er thresh­old may also sat­is­fy the needs of small­er investors seek­ing to com­plete a §1031 tax deferred exchange. TICs are still avail­able as a §1031 solu­tion but may not be the first solu­tion for a §1031 exchange uti­lized for many rea­sons. We will cov­er the dif­fer­ences between the TIC struc­ture and the DST struc­ture in detail in anoth­er writ­ing.

Investor Com­fort Zone
Investors who have invest­ed in com­mer­cial real estate over decades now are more than tip­ping their toe into the waters of Delaware Statu­to­ry Trust. Pri­or to 2023 there were record break­ing equi­ty raised in 2021 and 2022.  In 2021 near­ly $7.6 Bil­lion have been in alter­na­tive real estate which was more than the pre­vi­ous two years com­bined. 2022 equi­ty was over $9 Bil­lion raised. 2023 equi­ty raised moved back to what some experts cal­cu­late as a more con­ser­v­a­tive equi­ty rais­ing year of just over $5 Bil­lion.  The pull­back may be direct­ly relat­ed to the rise in inter­est rates. This rise in inter­est rates may affect the investors sell­ing their real estate enabling them to move into a DST.  Many of the same invest­ment cri­te­ria used by investors on tra­di­tion­al real estate acqui­si­tions are used for eval­u­at­ing a DST invest­ment. In a pre­vi­ous Edu­ca­tion­al Series, we cov­ered many aspects of the DST struc­ture.

Research & Due Dili­gence
We research, fol­low and speak direct­ly to many of the major spon­sors of DST. We also meet per­son­al­ly with spon­sors face to face. Since the twen­ty-year evo­lu­tion of DSTs there have been as many as sev­en­ty spon­sors of DSTs at one time pri­or to the great reces­sion.  Cur­rent­ly there are approx­i­mate­ly 35–40 spon­sors with a vari­ety of types and styles of offer­ings. DSTs may also be found in var­i­ous loca­tions through­out the USA. Investors are sur­prised to dis­cov­er what build­ings and real estate prop­er­ties are actu­al­ly a DST. Some types of DST may be ref­er­enced as the asset class. The asset may be in an indi­vid­ual loca­tion or include mul­ti­ple loca­tions if the offer­ing is struc­tured as a port­fo­lio. The port­fo­lio may be with­in one state or in dif­fer­ent states. At any giv­en point in time there may be over $2 Bil­lion dol­lars of equi­ty avail­able.  We track most of the major spon­sors (poten­tial­ly 25–30) at any giv­en time. Track­ing becomes some­what of a con­stant mon­i­tor­ing on an ongo­ing basis. A spon­sor with $15 Mil­lion of equi­ty may be avail­able for invest­ment just a few weeks. One or two large investors secure a large por­tion of the offer­ing, espe­cial­ly if the investors have a large 1031 exchange.  Spon­sors with offer­ings (above $50,000,000) may be avail­able longer sim­ply because of the offer­ing size.

Asset Class Overview:
Over­all asset class­es as men­tioned pre­vi­ous­ly are the same as tra­di­tion­al real estate own­er­ship. The list would include Mul­ti fam­i­ly (most often apart­ments), and all the for­mer sub­sets of mul­ti fam­i­ly that include stu­dent hous­ing, senior hous­ing, sin­gle fam­i­ly rental com­mu­ni­ties, and man­u­fac­tured hous­ing com­mu­ni­ties. The mul­ti­fam­i­ly sec­tor con­tin­ues to be the largest of offer­ings and largest invest­ed. The indus­tri­al sec­tor may include dis­tri­b­u­tion cen­ters as well as the pop­u­lar last mile dis­tri­b­u­tion cen­ters. Recent­ly small indus­tri­al offer­ings have become avail­able. Oper­at­ing com­pa­nies such as man­u­fac­tur­ing com­pa­nies (some cred­it rat­ed pub­lic com­pa­nies) may offer triple net struc­tures. There are med­ical office build­ings (MOB) that are small to medi­um size and may include port­fo­lios. Nec­es­sary retail that may be large facil­i­ties may include such rec­og­niz­able names as Wal Mart neigh­bor­hood cen­ters, Cabala’s Bass Pro Shops, etc. Self-stor­age facil­i­ties offer sin­gle sites as well as port­fo­lios. The office sec­tor may be struc­tured as a typ­i­cal DST with a dis­tri­b­u­tion stream or oth­er struc­tures offer­ing spe­cial ben­e­fits to sat­is­fy investor needs. Life Sci­ence was orig­i­nal­ly report­ed (two years ago) as a new­er asset class. Life sci­ence may be con­sid­ered more of an indus­tri­al asset class as com­pared to an office asset class.

Cash and Lever­age:
The DST offer­ing may be an all-cash invest­ment or may be struc­tured as a lever­aged offer­ing. All cash invest­ment elim­i­nates the risk of fore­clo­sure of the prop­er­ty. Since the spike in inter­est rates in 2023 two actions have hap­pened.  More all-cash offer­ings (poten­tial­ly 30% of all offer­ings) and low­er loan to val­ue (LTV) on DST with lever­age. Many investors do require some lever­age to com­ply with the §1031 tax deferred exchange rules. Investors who need greater LTV may be chal­lenged. Oth­er investors enjoy lever­age to increase the return poten­tial. The Loan to Val­ue (LTV) will be dis­closed with­in the Pri­vate Place­ment Mem­o­ran­dum (PPM). LTV may range from 0% (all cash) to as high as 85% in what is specif­i­cal­ly designed as a Zero Coupon Offer­ing.

Diver­si­fi­ca­tion:
Fre­quent­ly we rec­om­mend investors to con­sid­er diver­si­fy­ing their hold­ings by asset class, and geo­graph­ic loca­tions. This nat­u­ral­ly depends on how much cash is allo­cat­ed to the invest­ment or the amount of the 1031 pro­ceeds that need to be rein­vest­ed. Typ­i­cal­ly, the min­i­mum invest­ment amount is $50,000 for cash investors and $100,000 for §1031 tax deferred exchange investors. Iden­ti­fy­ing the assets for cash investors typ­i­cal­ly is eas­i­er. Cash investors are ready, will­ing, and able to sub­mit paper­work to secure their invest­ment. §1031 Exchange investors may be lim­it­ed by the clos­ing date of the prop­er­ty they are sell­ing. Pri­or to the §1031 investor clos­ing on their relin­quished prop­er­ty there may be review and due dili­gence per­form on the poten­tial asset. How­ev­er, many spon­sors may want the §1031 investor to be “in cash” pri­or to sub­mit­ting paper­work that reserves a posi­tion or por­tion of the sponsor’s DST offer­ing. In cash means the 1031 investor has closed on their relin­quished prop­er­ty and the qual­i­fied inter­me­di­ary (QI) has the pro­ceeds of the closed relin­quished prop­er­ty. Thus starts the crit­i­cal 45-day iden­ti­fi­ca­tion peri­od. This may be a stress­ful peri­od of time.  How­ev­er, with some pre-plan­ning on asset class­es and under­ly­ing needs and suit­abil­i­ty cri­te­ria, we hope to pro­vide viable options for the investor. Options change depend­ing on the cur­rent inven­to­ry of DST avail­able at any giv­en point in time.

We will expand on all the asset class­es in future sec­tions of the DST.EDU Series B DST Asset Clas­si­fi­ca­tions

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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Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC