Investors Doing their §1031/DST Research Overview ~ Part 1

The best edu­ca­tion­al infor­ma­tion we can pro­vide is a response to real-time investor ques­tions.  Investors who afford them­selves with ample time to do research and con­sult with experts have the best choic­es in select­ing alter­na­tives.

May 6, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ist & DST Advisor/Specialist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Over the years we have pro­vid­ed hun­dreds of arti­cles on many top­ics involv­ing alter­na­tive real estate invest­ments such as Delaware Statu­to­ry Trusts (DST’s). We have con­sis­tent­ly pro­vid­ed edu­ca­tion­al infor­ma­tion and have even writ­ten a book on a vari­ety of alter­na­tive real estate top­ics. These top­ics were dri­ven in part by ques­tions from poten­tial investors doing their research or due dili­gence. This will be a short series of arti­cles cov­er­ing recent ques­tions from investors. In this case the investor has pro­vid­ed them­selves with a long lead time inves­ti­gat­ing whether or not a DST is applic­a­ble in their sit­u­a­tion. Their research is start­ing pri­or to even list­ing their invest­ment prop­er­ties for sale. To coin a well-known phrase this investor is “start­ing with the end in mind”. We’ll cov­er six investor dri­ven top­ics or con­cerns that they have cur­rent­ly.  

1. What is the cur­rent DST mar­ket?
2. What is the DST struc­ture?
3. What are spon­sors’ respon­si­bil­i­ties?
4. What are the investor’s expec­ta­tions?
5. Any tax con­se­quences to dis­cuss with the CPA?
6. What type of rec­om­men­da­tions for diver­si­fi­ca­tion can be made?

There are a few dynam­ics in the cur­rent DST mar­ket. What is the sup­ply, are there “hot” prop­er­ties or assets, and have there been reg­u­la­to­ry changes affect­ing DSTs.

What is the Cur­rent DST Mar­ket?

The mar­ket for DSTs (as with all real estate) has changed over the past few years. The investor’s con­cern or ques­tion was either focused on whether there is an over­all short­age of DST’s or too many DST offer­ings. Too many DST offer­ings may indi­cate spon­sors chas­ing few­er investors at the cur­rent time. There appears to be more avail­abil­i­ty of DSTs when com­pared to three years ago. How­ev­er, every­thing is rel­a­tive. A few years ago, there were more over­all real estate trans­ac­tions that prompt­ed more §1031 tax deferred exchanges. (Many investors will look at DST as a §1031 exchange replace­ment prop­er­ty). Much of that has to do with the over­all real estate mar­ket slow­ing up, giv­ing the cur­rent lev­el of inter­est rates. The inter­est rates may lim­it the num­ber of buy­ers seek­ing to acquire the investors’ real estate, enabling the investor to move into a DST via 1031 exchange. There is a sil­ver lin­ing to have more DST inven­to­ry which trans­lates into allow­ing investors poten­tial­ly more time to review options.

Hot Prop­er­ties or Asset Class­es

The oth­er ques­tion the investor focused on was to deter­mine if there are DSTs with more demand than oth­ers (AKA what is a hot prop­er­ty). There may be an indi­ca­tion of what DST asset class is in more demand.  Cou­ple that with geo­graph­ic inter­est and that may reflect investor inter­est to a cer­tain degree. That may increase the demand. For gen­er­a­tions, mul­ti­fam­i­ly or apart­ment offer­ings have been the sta­ple for over­all real estate investors, includ­ing insti­tu­tion­al investors. That is still the case where the large per­cent­age of DST offer­ings are mul­ti­fam­i­ly prop­er­ties.  We do track avail­able DST equi­ty on a week­ly basis. The per­cent­age of mul­ti­fam­i­ly DST offer­ings pro­vid­ed by the major spon­sors cur­rent­ly is about 31% (of all offer­ings).  When you add the oth­er res­i­den­tial asset class­es (senior hous­ing, stu­dent hous­ing and man­u­fac­tured hous­ing) that per­cent­age is just over 40% of DST offer­ings are con­sid­ered res­i­den­tial. There is a new wrin­kle late­ly where the mul­ti­fam­i­ly offer­ing has been a mixed-use of mul­ti­fam­i­ly and retail. If you can pic­ture three or four sto­ries of mul­ti­fam­i­ly over top of a first-floor retail. This would poten­tial­ly be an urban sit­u­a­tion. About 16% of all the offer­ings are indus­tri­al prop­er­ty. The oth­er DST offer­ings which has gar­nered a lot of atten­tion, have been nec­es­sary retail. These retail offer­ings are typ­i­cal­ly diver­si­fied triple net leased port­fo­lios and now are near­ly 12% of over­all offer­ings. Self-stor­age, which over the years has been a sta­ble asset class, albeit lim­it­ed offer­ing, still seems to have a very good appeal for some investors.

The Geo­graph­ic Diver­si­fi­ca­tion is anoth­er con­cern or ques­tion that investors have with regards to com­plet­ing their due dili­gence as to eval­u­at­ing this sup­ply and demand of any spe­cif­ic DST. There are a lot of arti­cles that have been writ­ten about over­all invest­ment focus as being locat­ed in the “Smile States”. The smile states would be draw­ing a line from the West, for exam­ple Neva­da or Ari­zona, dip­ping down to cap­ture Texas and up through the South­east, includ­ing Flori­da and the Car­oli­nas. These states do seem to be the areas of con­cen­tra­tion for offer­ings. How­ev­er, there are offer­ings in many states from the North­east to the Mid­west to the North­west. There are also offer­ings that have mul­ti­ple states. Mul­ti state offer­ings may be as lit­tle as two states to as many as 8 or 10 states that can be pack­aged togeth­er, pro­vid­ing a large geo­graph­ic mix or diver­si­fi­ca­tion poten­tial for the investor. As always, diver­si­fi­ca­tion does not elim­i­nate risk but seeks to mit­i­gate risk by spread­ing invest­ment dol­lars across dif­fer­ent geo­graph­ic regions and poten­tial­ly dif­fer­ent asset class­es.

Reg­u­la­tions:

The investor asked the ques­tion about reg­u­la­to­ry trends for DST. DSTs are reg­is­tered as Reg­u­la­tion D offer­ings (Reg D). Reg­u­la­tion D, Rule 506(b) and Rule 506© are both exemp­tions under U.S. Secu­ri­ties laws that allow com­pa­nies to raise cap­i­tal with­out reg­is­ter­ing the offer­ing with the SEC. How­ev­er, they are dif­fer­ent, and they dif­fer in a few key ele­ments. Rule 506(b) is a tra­di­tion­al pri­vate place­ment. Adver­tis­ing or gen­er­al solic­i­ta­tion is not per­mit­ted, so you can­not adver­tise the offer to the gen­er­al publics. In these types of offers, there are per­mit­ted to be a lim­it­ed num­ber of non-accred­it­ed but sophis­ti­cat­ed investors who must have suf­fi­cient knowl­edge and expe­ri­ence. Typ­i­cal­ly, 35 non-accred­it­ed investors is the lim­it for spon­sors to track. The ver­i­fi­ca­tion for accred­it­ed stat­ue is also some­thing which is a lit­tle dif­fer­ent because it per­mits the investor to self-cer­ti­fy that they are an accred­it­ed investor. There are dis­clo­sure require­ments that all spon­sors must adhere to, in order to have these offer­ings as a (b). Rule 506© per­mits gen­er­al solic­i­ta­tion. This means that adver­tis­ing is per­mit­ted, and the offer­ing may appear on the Inter­net, the TV, social media, et cetera. How this affects the spon­sor is that it shifts the respon­si­bil­i­ty of ver­i­fy­ing the accred­it­ed investor sta­tus to the spon­sor. 506© offer­ing are only offered to accred­it­ed investors. There are no excep­tions for non-accred­it­ed investors. So, what’s the dif­fer­ence from reg­u­la­to­ry inter­pre­ta­tion. If a rep­re­sen­ta­tive who deals with an investor have and exe­cut­ed a 506(b) agree­ment with the spon­sor the rep­re­sen­ta­tive must have an exist­ing rela­tion­ship with a poten­tial investor. If the sell­ing agree­ment is in place with the spon­sor pri­or to the intro­duc­tion of the offer­ing to an investor this is con­sid­ered con­tra­ven­tion and sub­ject to a fine by the SEC. Under our best prac­tices we will con­duct our nor­mal due dili­gence for all DST offer­ings, but we wait to exe­cute any type of for­mal sell­ing agree­ment with the spon­sor until we have engaged with the indi­vid­ual investor. This enables us to be on the investor side of the table rather than pro­vid­ing or giv­ing the impres­sion that we are employed by the spon­sor to sell their prod­uct. We want to have total trans­paren­cy that we work for and on behalf of the investor. One investor recent­ly stat­ed that if we have signed a sell­ing agree­ment with a 506(b) offer­ing it would appear that we may be work­ing for the spon­sor and not have their best inter­est in mind.  As a fidu­cia­ry we are com­mit­ted to pro­vid­ing investors with a focus on align­ment of investor inter­est.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

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 §1031 Tax 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 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. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.