DST.EDU Series B- Asset Classification Discussion Retail

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

Delaware Statu­to­ry Trusts (DSTs) con­tin­ue to gain in pop­u­lar­i­ty among cash investors and 1031 tax deferred exchange investors. Investors seek­ing diver­si­fi­ca­tion may refo­cus on a spe­cif­ic style of retail invest­ment.   

Part 10: Nec­es­sary Retail

April 30, 2024
Orig­i­nal­ly post­ed: June 30, 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

Why Invest­ing in Retail Makes Sense
Dri­ving around most cities and towns we see many busi­ness­es that pro­vide valu­able ser­vices to the pub­lic. Retail has been a major dri­ver of the econ­o­my over decades. There is a wide vari­ety of retail space that exist from small strip cen­ters, neigh­bor­hood cen­ters, region­al cen­ters, pow­er cen­ters and major lifestyle cen­ters. In some areas of the coun­try, we are sur­round­ed by retail. In rur­al areas you may need to dri­ve miles to pur­chase gro­ceries and oth­er nec­es­sary items for dai­ly life. With the poten­tial of lifestyle cen­ters all retail­ers have one goal in mind and that is to sell ser­vices or goods. Over the past 5 years there has been an accel­er­a­tion in the e‑commerce sec­tor (dri­ven by tech­nol­o­gy) cre­at­ing com­pe­ti­tion in the brick & mor­tar out­lets. Today the role of Arti­fi­cial Intel­li­gence (AI) cre­ates addi­tion­al poten­tial accel­er­a­tion in new devel­op­ments in retail sec­tor advance­ments. Many of the brick & mor­tar stores have opened on-line out­lets. There are active spon­sors of DSTs struc­tur­ing offer­ings with the poten­tial for high­er-than-aver­age risk adjust­ed return, espe­cial­ly with ris­ing bor­row­ing rates. How­ev­er, the investor needs to under­stand the dynam­ics of the var­i­ous retail sec­tor.

Under­stand­ing the Retail Asset Class
As with all asset class investors need to under­stand what can cre­ate a suc­cess­ful invest­ment.  With retail there may be more vari­ables that may be out of the con­trol of the devel­op­ment com­pa­ny or in the case of a DST the spon­sor.  The suc­cess of a retail invest­ment may be direct­ly linked to the prop­er­ty.  The US econ­o­my has a direct cor­re­la­tion to the suc­cess of many retail prop­er­ties.  Indi­ca­tors includ­ing job cre­ation and increased earn­ings across all employ­ment sec­tors do add to con­sumer con­fi­dence.  The ten­ant who would be rent­ing the prop­er­ty actu­al­ly cre­ate the val­ue of their busi­ness enabling the busi­ness to make a prof­it and afford to make lease pay­ments to the under­ly­ing investors. Retail that can build a brand that con­sumers have con­fi­dence in the qual­i­ty of ser­vice or effec­tive­ness of the prod­ucts prompt­ing the con­sumer to buy will add to the ten­ant suc­cess. That would equate to ten­ant renewals for the land­lord or investor.

Retail includes an over­whelm­ing list of types of build­ings, loca­tions, and designs. We will pro­vide a brief overview pri­or to a deep­er dive into the DST style offer­ing. An investor needs to under­stand the types of retail offer­ing. We need to sep­a­rate the style of retail that attempts to retain cus­tomers through cus­tomer loy­al­ty pro­grams in cus­tomer con­sump­tion of goods and ser­vices that fall out­side what is con­sid­ered nec­es­sary retail.

Lease Types, Anchors and Dura­tionWe fre­quent­ly hear the term Triple-Net Leas­es or if in type NNN. Land­lord (investors) may pre­fer the NNN struc­ture. The main rea­son is the ten­ant is respon­si­ble for all tax­es, main­te­nance and insur­ance on the prop­er­ty. There may be vari­a­tions to this struc­ture. The land­lord shifts the finan­cial risk to the ten­ant. One con­cern for the investor may be how well the ten­ant main­tains the build­ing and poten­tial prob­lems fail­ing to main­tain prop­er­ly.

Long term leas­es may ben­e­fit both the land­lord as well as the ten­ants.  Leas­es may be as short as a few years, up to 20 years. Hav­ing a longer lease may assist the ten­ants to build­ing their name recog­ni­tion, brand and longevi­ty in a neigh­bor­hood or loca­tion.

Does E‑Commerce offer Syn­er­gy.
When we hear E‑Commerce, we may have visions of every­one order­ing online for many goods and ser­vices. Investors may be ner­vous of the word e com­merce and the poten­tial effect on retail prop­er­ty suc­cess.  True there are ten­ants mov­ing from a tra­di­tion­al store­front and seek­ing a posi­tion online with brand iden­ti­ty seek­ing to cre­ate or in some cas­es recre­ate a busi­ness.  E com­merce and inter­net sales will con­tin­ue and may not be con­sid­ered a threat but have a syn­er­gis­tic effect on cer­tain retail. The oth­er dynam­ic is the increased phys­i­cal stores for some online sell­ers.  For exam­ple, Ama­zon will con­tin­ue to increase their phys­i­cal pres­ence. There are also strate­gic rela­tion­ships with online sell­ers offer­ing cus­tomers to abil­i­ty to return unwant­ed mer­chan­dise at a phys­i­cal loca­tion. The growth of e‑commerce has been one of the biggest growth sto­ries of our time (accord­ing to Mar­ket research.com).

The rela­tion­ship between the E‑commerce sec­tor will con­tin­ue to evolve with the phys­i­cal retail stores and may not hurt the retail sec­tor just cre­at­ing a new rela­tion­ship. There are con­sumers who want to be in a retail envi­ron­ment. This rela­tion­ship enables con­sumers to engage with sell­ers in what may be ref­er­enced as omnichan­nel retail­ing.

Is Any Retail Insu­lat­ed?
There is anoth­er type of retail sec­tion that is worth men­tion­ing. We may ref­er­ence this as “the Insu­lat­ed Retail Ten­ant”. The pro­files of the retail ten­ant, (that may be includ­ed in a Retail DST), would address those that e‑commerce sec­tor that are impos­si­ble to replace. Ser­vices like a dry clean­er, spe­cial­ty restau­rant, such a juice ven­dor, ice cream, a clin­ic, nail salon, and oth­ers that involve labor to pro­vide the ser­vice to the cus­tomer.   Over­all seek­ing diver­si­fied and desir­able Retail ten­ants that can fill the park­ing lot with repeat cus­tomers, whether its week­ly, month­ly, or quar­ter­ly.

DST Retail Alter­na­tive
The DST retail offer­ing seeks a some­what dif­fer­ent approach to a typ­i­cal retail offer­ing. Over the past few years (and espe­cial­ly dur­ing the COVID envi­ron­ment) the offer­ings have focused on nec­es­sary retail. Recent port­fo­lio offer­ings have includ­ed Wal­mart neigh­bor­hood stores, Kroger super­mar­ket, Pub­lix Gro­cery stores, NAPA Auto Parts, CVS, Wal­greens, Dol­lar gen­er­al, Fre­se­nius Dial­y­sis cen­ter, trac­tor sup­ply and oth­er sim­i­lar types of stores. These phys­i­cal loca­tions would also have long-term leas­es.  This port­fo­lio would not include a small unbrand­ed retail store in a strip cen­ter. The oth­er dynam­ic of a diver­si­fied port­fo­lio of prod­uct types would be geo­graph­ic diver­si­fi­ca­tion.  Many of the port­fo­lios would include assets locat­ed in a vari­ety of mar­kets or states.  A port­fo­lio may have 18 dif­fer­ent prop­er­ties locat­ed in 9 states.  There have also been sin­gle asset retail offer­ings. For exam­ple, there have been BJ Whole­sale stores or Cabela’s Bass Pro shops that have appeared in DST offer­ings over the years.

Con­clu­sion
The impor­tance of spend­ing by con­sumers can­not be ques­tioned as a crit­i­cal part of the econ­o­my.  Many of the same invest­ment cri­te­ria for investors in a non-DST invest­ment are used for DST offer­ings. How­ev­er, there may be an expand­ed vision of retail with a DST offer­ing.  The main dif­fer­ence may be the abil­i­ty in a DST to obtain diver­si­fi­ca­tion both with mar­kets and num­ber of assets that may assist to mit­i­gate risk for the investor. An investor with $1 MM to invest in a tra­di­tion­al real estate may have one loca­tion and with lever­age may be forced to sign for a recourse loan on the asset. With a diver­si­fied DST port­fo­lio, the same $1 MM may pro­vide the investor with many more assets in their port­fo­lio, non-recourse debt (if lever­aged) and poten­tial­ly geo­graph­i­cal diver­si­fi­ca­tion.  In addi­tion, the pas­sive nature of the DST with no man­age­ment respon­si­bil­i­ties may relieve investors of oth­er con­cerns. 

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).

NAMCOA’s 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.

Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC