DST.EDU Series B- Asset Classification Discussion Multi Family

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

Part 2: Mul­ti Fam­i­ly Asset Clas­si­fi­ca­tion

Delaware Statu­to­ry Trust (DST) uti­lize the same asset class­es as com­mer­cial real estate. When mul­ti­fam­i­ly asset class becomes a top­ic of dis­cus­sion there is a lack of for­mal def­i­n­i­tion of the vari­a­tions of mul­ti­fam­i­ly assets. 

April 5, 2024
Orig­i­nal­ly post­ed on May 10, 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

Now mul­ti­fam­i­ly has focused on the apart­ment style of offer­ings. At one time oth­er res­i­den­tial offer­ings were includ­ed as a sub­set of mul­ti­fam­i­ly. Those sub­sets are now their own class such as stu­dent hous­ings, senior hous­ing, Sin­gle fam­i­ly rental (SFR), build for rent (BFR).

Build­ing Styles and Loca­tions.
Mul­ti fam­i­ly may come in a vari­ety of build­ing styles. There are mul­ti sto­ry build­ings from two sto­ries to mul­ti sto­ry build­ings as well as repur­posed build­ings. Loca­tions may be in urban, sub­ur­ban, or near inter­state exchanges. . The con­struc­tion of the build­ings may be pur­pose built or a con­ver­sion of an old­er build­ing. In the past few years hor­i­zon­tal apart­ments have entered the scene. The site may resem­ble small­er detached build­ings with a sin­gle prop­er­ty iden­ti­fi­ca­tion descrip­tion (PID). The con­ver­sion of old­er build­ings to mul­ti-ten­ant dwellings are appear­ing in cities as prop­er­ty own­ers may be repur­pos­ing the asset.

For exam­ple, in cities like Philadel­phia a ware­house along the water­front may be con­vert­ed into res­i­den­tial flats. In cer­tain cities there may be spe­cial tax abate­ment or incen­tives to rede­vel­op. In the past  we placed an investor in a mul­ti­fam­i­ly prop­er­ty that had a twen­ty-year tax incen­tive.  Not all loca­tions can be guar­an­teed this spe­cial sit­u­a­tion.

Asset class Grad­ing
The prop­er­ties may also be sep­a­rat­ed into a clas­si­fi­ca­tion or grad­ing sys­tem from Class A (high­est), Class B, C & D.  The grad­ing may be sub­jec­tive in nature depend­ing on who is mak­ing the eval­u­a­tion.  Spon­sors of Delaware Statu­to­ry Trust (DST) will con­duct due dili­gence into the var­i­ous prop­er­ties. It becomes very impor­tant to under­stand the under­ly­ing prin­ci­ples that cre­ate the risk / return pro­files of the oppor­tu­ni­ties pri­or to acqui­si­tion. There may also be a fine line between the asset clas­si­fi­ca­tion.  Spon­sors, Invest­ment rep­re­sen­ta­tives as well as investors need to be objec­tive in eval­u­at­ing the cri­te­ria and offer­ings. Many DST will focus on new­er built prop­er­ty to elim­i­nate the need to spend addi­tion­al cash on repairs.

The Class A prop­er­ties will nor­mal­ly have sim­i­lar qual­i­ties. These qual­i­ties may be the phys­i­cal loca­tions with access to good schools, shop­ping, and oth­er geo­graph­ic assets.  Nor­mal­ly these prop­er­ties can gen­er­ate the high­est rents in the sub­mar­ket. The con­struc­tion may be more recent (built with the past 10 years) and there may be lit­tle deferred main­te­nance.  The word lux­u­ry is used often (maybe too often). How­ev­er, this may be draw for high-income ten­ants.

The Class B prop­er­ties are still very func­tion­al and use­ful and a step down from Class A.  The age may be old­er (built 10–30 years ago typ­i­cal­ly).  The prop­er­ties may be in need of main­te­nance and poten­tial­ly have need of inte­ri­or upgrades as well as exte­ri­or ameni­ties. Because of these fac­tors rents will be at mid-lev­el.  How­ev­er, there may be upside poten­tial for spon­sors. The upside may be cre­at­ed as a result of inte­ri­or fin­ish pack­ages being installed that may cre­ate rent increas­es.

The Class C prop­er­ties may be an option for renters who rent out of neces­si­ty.  The term work force hous­ing occa­sion­al­ly comes up in this dis­cus­sion.  The prop­er­ties tend to be old­er, build 30–50 years ago.  With prop­er­ties built that long ago there may be obso­les­cence either in the floor plans, HVAC, ceil­ing heights and oth­er out­dat­ed phys­i­cal aspects. The ten­ant base may also be low­er income (pay­check to pay­check). These prop­er­ties may be a great oppor­tu­ni­ty for val­ue-add strat­e­gy.  The cau­tion would be the extend of addi­tion­al cap­i­tal required to ele­vate to class B.  The phys­i­cal loca­tion of the prop­er­ty may war­rant a full inves­ti­ga­tion.

Class D prop­er­ties once again are old­er and may include very low-income hous­ing. Unfor­tu­nate­ly, the loca­tion may be in high­er crime areas. These areas also have addi­tion­al require­ments for secu­ri­ty and increased main­te­nance. The vacan­cy rate and turnover may also be a con­cern for investors.

 Each of the asset class­es have a dif­fer­ent risk pro­file. When DST spon­sors are seek­ing prop­er­ties for acqui­si­tion and ulti­mate pack­ag­ing for indi­vid­ual investors the Class A and poten­tial­ly Class B become the low hang­ing fruit so to speak. 

Recent Activ­i­ty
After mid 2023 when inter­est rates start­ed to rise there have been sig­nif­i­cant changes in many aspects of DST mul­ti­fam­i­ly offer­ings.  Pri­or to the inter­est rate increase many spon­sors had added inven­to­ry of DSTs. While mul­ti­fam­i­ly prop­er­ties con­tin­ue to be the largest num­ber of offer­ings as well as the largest asset class obtained. The Indus­tri­al asset class has gained in [pop­u­lar­i­ty. The appeal of mul­ti­fam­i­ly con­tin­ues to be strong for many of the same rea­son.  

DST mul­ti-fam­i­ly offer­ing nor­mal­ly have over 200 units (an upwards of 400 units). In addi­tion, DST spon­sors may pack­age sev­er­al com­plex­es to offer assets that con­tain 800 units.  The dynam­ics of mul­ti­ple units all with dif­fer­ent lease expi­ra­tion dates enable the prop­er­ty man­agers to respond to mar­ket rate increas­es.  The rental increas­es may only hap­pen once per year on the renew­al or on the turnover when a renter moves out. The prop­er­ty man­agers have the respon­si­bil­i­ty to min­i­mize the down time and release the prop­er­ty. DST are pas­sive invest­ment that enable the indi­vid­ual investor to enjoy the ben­e­fits of own­er­ship with­out deal­ing with prop­er­ty man­age­ment, lease renewals, or cap­i­tal improve­ments.

Fea­tures & Prod­uct Mix
Each prop­er­ty may have unique fea­tures that may add to the over­all appeal of the prop­er­ty. Tech­nol­o­gy has increased the abil­i­ty for prop­er­ty man­agers to han­dle larg­er num­bers of units.  Elec­tron­ic entry and dig­i­tal lease and online appli­ca­tion increased effi­cien­cies as a result of COVID and those prac­tices are still being used.  The prod­uct mix mean­ing the num­bers of stu­dios, one bed­room, two bed­rooms and poten­tial­ly three bed­rooms may be dif­fer­ent depend­ing on the mar­ket.  In urban areas the need for small­er units may be greater than sub­ur­ban loca­tions. When you look at a matrix of the DST offer­ings the major­i­ty of units are one and two bed­rooms.

Ameni­ties galore
The com­mu­ni­ty ameni­ties could sep­a­rate one asset from anoth­er.  Here is an exam­ple from one closed DST offer­ing. Please note this not to rep­re­sent what all Mul­ti­fam­i­ly prop­er­ties con­tain. “Com­mu­ni­ty ameni­ties may include a design­er club­house with com­pli­men­ta­ry gourmet cof­fee bar; a work­space with pri­vate, ful­ly sup­plied offices, ded­i­cat­ed cof­fee bar and con­fer­ence room; resort-style pool with sun shelf and pool­side cabanas; a state-of-the-art 24-hour fit­ness and yoga/cross train­ing cen­ter with fit­ness on-demand kiosk; week­ly onsite fit­ness class­es; com­mu­ni­ty iMac and res­i­dent print­er sta­tion; a 24-hour access-con­trolled pack­age room; mul­ti­ple out­door grilling sta­tions; Wi-Fi access through­out the club­house and com­mon areas; a fam­i­ly hang­out and kids play area; valet waste and recy­cling; a social room with pok­er table and shuf­fle­board; an out­door pavil­ion with lounge seat­ing and a ping pong table; a fenced pet park; a pet spa with mul­ti­ple wash sta­tions and a groom­ing table; car charg­ing sta­tions; out­door court­yard with ham­mocks and firepit; con­trolled access gat­ed com­mu­ni­ty; 24-hour onsite com­mu­ni­ty mar­ket; pri­vate garages and stor­age; and ele­va­tor access”.

Loca­tion, Loca­tion, still impor­tant
The phys­i­cal loca­tion of the prop­er­ty may be anoth­er impor­tant fea­ture. Many poten­tial ten­ants want to know how close the shop­ping is, restau­rants, employ­ment oppor­tu­ni­ties, school qual­i­ty and prox­im­i­ty, and oth­er exter­nal ameni­ties.

There may also be region­al fea­tures such as a high­ly edu­cat­ed pop­u­la­tion of res­i­dents with­in a cer­tain radius on the prop­er­ty. Hav­ing an edu­cat­ed work­force may assist com­pa­nies look­ing to relo­cate which in turn could bring an increase of jobs which ben­e­fits the over­all com­mu­ni­ty.

Expe­ri­ence becomes an advan­tage:
The sponsor’s expe­ri­ence may also be a com­pet­i­tive advan­tage.  The over­all ques­tion regard­ing the spon­sor may be do they spe­cial­ize in acqui­si­tion devel­op­ment, man­age­ment and repo­si­tion if real estate invest­ment assets.

We will expand on oth­er asset class­es in future sec­tions of the DST.EDUE Series B DST Asset Clas­si­fi­ca­tions. The next top­ic of dis­cus­sion will be Stu­dent Hous­ing. 

Investor Lim­i­ta­tions:
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/SIPC8215 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