Investors Doing their §1031/DST Research Overview ~ Part Six What are the Diversification Options   

Using a Delaware Statu­to­ry Trust (DST) in a 1031 exchange can offer investors sev­er­al diver­si­fi­ca­tion strate­gies, both geo­graph­ic and across asset class­es. We con­tin­ue the Investor Dri­ven series research­ing a §1031 exchange with the uti­liza­tion of a DST as the replace­ment prop­er­ty.

May 29, 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

Part Six will focus on the types of diver­si­fi­ca­tion that may be sug­gest­ed for investors using DSTs. All sug­ges­tions need to adhere to suit­abil­i­ty align­ment for the investor. We will cov­er a vari­ety of poten­tial diver­si­fi­ca­tion strate­gies. There may also be a com­bi­na­tion of sev­er­al strate­gies at the same time.  Ulti­mate­ly the indi­vid­ual investor needs to be com­fort­able with the final selec­tion.

Geo­graph­ic Diver­si­fi­ca­tion. One of the under­ly­ing advan­tages of the DST is the abil­i­ty to move the invest­ment focus from one loca­tion to anoth­er. Investors can spread their cap­i­tal across DSTs that own prop­er­ties in dif­fer­ent regions, states, or cities. This reduces risk tied to local eco­nom­ic down­turns, nat­ur­al dis­as­ters, or reg­u­la­to­ry changes. Here is an exam­ple.  Over the years we have assist­ed investors from all over the coun­try. A Cal­i­for­nia investor may sell a rental prop­er­ty in Cal­i­for­nia and rein­vests into DSTs with prop­er­ties in Texas, Flori­da, and North Car­oli­na. There are mul­ti­ple rea­sons and strate­gies for investors in cer­tain states to invest in alter­na­tive geo­graph­ic loca­tion. We also have investors who live in one state and own invest­ment prop­er­ty in a sec­ond state and want to acquire replace­ment prop­er­ty in a third state. Sounds com­pli­cat­ed but eas­i­ly attain­able.

Asset Class Diver­si­fi­ca­tion. The same asset class­es in tra­di­tion­al real estate exist in DST offer­ings. Because of the scale of DST offer­ings (typ­i­cal min­i­mum $100,000) an investor may be in a posi­tion to select var­i­ous real estate sec­tors, allow­ing investors to avoid con­cen­tra­tion in one type.

This is a poten­tial list of asset class­es:

• Mul­ti­fam­i­ly apart­ments
• Stu­dent hous­ing
• Senior hous­ing
• Man­u­fac­tured hous­ing
• Indus­tri­al prop­er­ties
• Med­ical office build­ings
• Retail (e.g., gro­cery-anchored cen­ters)
• Self-stor­age facil­i­ties
• Hos­pi­tal­i­ty (now all cash offer­ing to reduce risk)

Ten­ant Diver­si­fi­ca­tion. There are a vari­ety of DSTs that have diver­si­fi­ca­tion of ten­ants under a mas­ter lease agree­ment. DSTs often have mul­ti­ple ten­ants or may invest in port­fo­lios with mul­ti­ple prop­er­ties, which reduces depen­den­cy on a sin­gle tenant’s per­for­mance. A DST that owns a shop­ping cen­ter with anchor ten­ants like CVS, Star­bucks, and a local gro­cer spreads risk across busi­ness­es. A new­er type of indus­tri­al offer­ings (with demand) would be a small indus­tri­al bay facil­i­ty. This may be mul­ti­ple busi­ness­es with retail or com­pa­ny offices in front and roll up doors and stor­age in the rear.  These may be mul­ti­ple spaces (2,000 sf +/-) and with mul­ti­ple ten­ants offer sev­er­al advan­tages.

Spon­sor Diver­si­fi­ca­tion. There are many spon­sors with alter­na­tive real estate offer­ings includ­ing DSTs. Investors can choose DSTs man­aged by dif­fer­ent spon­sors or asset man­agers. Each may have a unique invest­ment strat­e­gy, risk pro­file, or geo­graph­ic focus. One of the ben­e­fits may be tore­duce the reliance on the suc­cess and deci­sions of one man­age­ment com­pa­ny.

Lease Struc­ture Diver­si­fi­ca­tion. Most if not all DST have a mas­ter lease struc­ture. When you iden­ti­fy the spe­cif­ic DST there are dif­fer­ent lease struc­tures under the mas­ter lease. Investors can tar­get DSTs with a mix of Triple Net leas­es (NNN) or Gross Lease. The NNN tra­di­tion­al­ly has low­er man­age­ment respon­si­bil­i­ty, but long-term ten­ant depen­den­cy. The Gross leas­es may be more typ­i­cal with more land­lord respon­si­bil­i­ty, poten­tial­ly high­er returns and flex­i­bil­i­ty. This is com­mon with most of the DSTs such as self-stor­age, mul­ti­fam­i­ly and oth­ers.

Income vs. Appre­ci­a­tion Diver­si­fi­ca­tion. With­in the Pri­vate Place­ment Mem­o­ran­dum (PPM) spon­sors will describe the over­all invest­ment strate­gies. Some DSTs pri­or­i­tize steady income, while oth­ers focus on poten­tial long-term appre­ci­a­tion (e.g., ground-up devel­op­ments). There are also DSTs (ref­er­enced as zero coupon) that have poten­tial tax effi­cien­cies with high LTV and no income dis­tri­b­u­tion. All rents are applied to pay­ing down the mort­gage.  Spon­sors may also uti­lize cost seg­re­ga­tions to increase poten­tial tax ben­e­fits. We have a vari­ety of arti­cles that high­light those strate­gies.

Decid­ing on the cor­rect path. As men­tioned pre­vi­ous­ly the deci­sion will be made by the investors (with advisor’s guid­ance and exper­tise) and include sev­er­al strate­gies. One of the lim­it­ing fac­tors may be the avail­abil­i­ty of spe­cif­ic assets with­in a spe­cif­ic geo­graph­ic loca­tion being avail­able at any giv­en time. Bal­anc­ing a port­fo­lio will depend on the bal­anc­ing of the debt replace­ment (if need­ed) and uti­liz­ing all the cash to ful­ly com­ply with the §1031 Exchange. We sug­gest always hav­ing a back­up plan. Here is a poten­tial DST port­fo­lio (as a hypo­thet­i­cal exam­ple but not a rec­om­men­da­tion).

• 25% in a mul­ti­fam­i­ly com­plex in Flori­da (income-focused)
• 15% in a med­ical office in Dal­las (sta­ble ten­ant)
• 25% in an indus­tri­al ware­house in Phoenix (growth mar­ket)
• 35% in a NNN nec­es­sary retail port­fo­lio across eight states (low capex, low turnover risk)

Investors who engage with DST advi­sors who are well versed in DST offer­ings as well as Spon­sor inter­ac­tion.  We con­tin­u­ous­ly review DST offer­ings every week.  This is espe­cial­ly crit­i­cal when investors con­tact us when the investor is well with­in their 45-day iden­ti­fi­ca­tion peri­od. We also take the time and effort to attend third part due dili­gence con­fer­ences to keep abreast of leg­isla­tive and reg­u­la­to­ry changes. Over­all, we main­tain a fidu­cia­ry rela­tion­ship with poten­tial investors.

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.