Through the end of August there are continued signs of equity absorption. There were eight (8) DST programs fully subscribed or closed.
September 15, 2024
By Al DiNicola, AIF®, CEPA™
DST 1031 Specialist
NAMCOA® — Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC Member of FINRA/SIPC
Five (5) new offerings came on the market for investors. Absorption has moved in the right direction with regards to days on the market. One offering was on the market of 24 months and another on the market for about 12 months. The remaining six were on the market for 9 months or less with one on the market for only 42 days. For the second month in a row the equity raised was just about $500 Million. Another sign indicating movement in the right direction. Current equity raised in nearly $3.5 Billion.
Available equity:
There was a net-net reduction of equity of about $40,000. While the shift in the percentage of equity absorbed and available may only be minor there may be early signs of trends. Available equity naturally is driven by absorption from the previous month. The absorption in the industrial asset class reached over 34% as compared to absorption in the multifamily class of about 30%. Overall resorption by asset class is also driven by the number of offerings. There were more industrial and multifamily offerings as an asset class than other asset classes such as necessary retail and especially self-storage.
Five New Offerings:
The number of new offerings added total only five (5) as compared to four (4) last month. Added programs included two industrial offerings, one office medical, one multifamily and one necessary retail. Net equity available has remained the same at around $2.1 Billion. As a note we review all new offerings and review due diligence materials when available.
Tracking Inventory:
There was a large amount of equity absorbed in the multifamily space resulting in a shift with the balance of equity available. For the first time industrial offerings have replaced multifamily with dollar volume. However, there are 25 active multifamily offerings compared to 23 industrials. Over the years multifamily has comprised nearly 50% of all offerings. Currently Multifamily is 30% of the offerings with industrial 28%. A noted observation would be 13 of the 19 retail offerings are all cash offerings (without leverage or debt). That produces an average LTV in the sector of 14.26%. Leverage overall has decreased with the cost of funds as well as a move to potentially more conservative underwriting.
Un-leveraging the offerings- Now a Trend
DSTs by design included leverage as an attribute to solve the debt replacement requirements of the §1031 exchange. Recently more direct cash investors as well as all cash §1031 seek to minimize risk and acquire DST with no (or little leverage). All sectors have reduced the amount of leverage. Here are the sectors and their corresponding LTV percentages: Energy 9%; Hospitality 23%; Industrial 23%; Multifamily 37%; Student housing 45%; Office 33%; Office Medical 11%; Retail 14%; Self Storage 0%; Sr. Housing 0%. This move to a potentially more conservative underwriting creates challenges for investors who need to acquire a higher replacement LTV. We specially have designed strategies to enable investors to successfully execute their 1031 exchanges.
Average Projected Year One distribution:
Many of the investors who are moving into DSTs are arriving via 1031 tax deferred exchange. There are many benefits of that vehicle. Investors enjoy the passive income and potential tax advantaged income. The projected first year distribution is still around 4.9% average. Many DST, by design with interest only loans in the beginning years and then move to amortizing loans. Interest only loans provide more initial cash flow to investors. Once the loan begins to amortize then additional equity is built up as the loan amount is paid down.
Accredited Investors and Risk:
We do receive questions from callers regarding if they qualify as an accredited investor or not. One recent call from an investor who was selling a $3,000,000 investment property with $500,000 of debt was asking if they qualified as an accredited investor. Once you subtract the $500,000 of debt from the $3,000,000 investment property the net is $2,500,000 which on its face would qualify as an accredited investor. If that same investor had no other significant debt this would indicate he would be a qualified or accredited investor. A CPA or financial advisor can review the investor’s balance sheet and provide acknowledgement that that investor is accredited. The SEC and FINRA may require financial advisors and representatives who handle DST’s to provide evidence that the investors are accredited.
Balance of the year projections
Many investors, especially in light of the election coming up, may scramble to sell investment real estate and other assets prior to the end of the year and reposition their holdings. We have received calls from investors asking preliminary questions about disposing of their traditional real estate holdings and seeking diversification. Diversification does not eliminate risk but seeks to minimize risk. An investor selling one investment property for $3,000,000 and paying off the debt of $500,000 can invest the proceeds of $2.5 million in a variety of DSTS. One strategy may divide the $2.5 million of proceeds into potentially 5 different DST’s that will have some level of leverage to satisfy the replacement of the $500,000 debt if the investor wants to fully take advantage of the section 1031 exchange deferral.
Given the current equity raised sitting at $3.5 Billion there is a strong potential for the total equity to exceed $5 Billion and potentially $5.5 Billion with an end of the year serge. Financial advisors and representatives are constantly reviewing offerings and due diligence materials in order to assist investors.
Investor Restriction:
DST’s (Delaware Statutory Trusts) are for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and compliment your financial objectives. 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, in any form, 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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