Purchase Price vs. Offering Value — Where Did the Investor’s Money Go? | Article 1 of 14

DST Due Dili­gence Lab  •  How I Look at a Trans­ac­tion 

By Al DiNi­co­la, AIF®
VP, Invest­ment Prop­er­ty Wealth Man­age­ment®
Real­ized Finan­cial, Inc
Co-author, DST Wealth Build­ing
Edi­tor, DSTNews.org

If I see a prop­er­ty pur­chased for $40 mil­lion in a DST offer­ing with $43 mil­lion of total cap­i­tal­iza­tion, I do not imme­di­ate­ly con­clude that some­body over­paid. I ask a dif­fer­ent ques­tion: what accounts for the $3 mil­lion dif­fer­ence, and which parts rep­re­sent expens­es ver­sus assets that remain in the trust?

Start with three different figures

For Har­bor Point, $40 mil­lion is the con­tract­ed prop­er­ty price. The $43 mil­lion fig­ure is the com­plete amount need­ed to close and estab­lish the invest­ment. The $23 mil­lion equi­ty raise is the por­tion sup­plied by investors after the $20 mil­lion loan. These fig­ures should nev­er be used inter­change­ably. In par­tic­u­lar, an investor does not buy a $43 mil­lion build­ing sim­ply because total sources and uses equal $43 mil­lion. I would look at the pur­chase agree­ment and a cur­rent inde­pen­dent val­u­a­tion to under­stand whether the $40 mil­lion price itself is sup­port­able.

Separate money spent from money retained

Our $3 mil­lion dif­fer­ence includes $2 mil­lion of trans­ac­tion-relat­ed costs and $1 mil­lion of reserves. The $1 mil­lion gen­er­al­ly remains avail­able inside the trust for spec­i­fied pur­pos­es; it is not auto­mat­i­cal­ly a fee. The $2 mil­lion may include lender, legal, title, secu­ri­ties-dis­tri­b­u­tion and spon­sor-relat­ed costs. Some may be paid to inde­pen­dent ser­vice providers; oth­ers may cre­ate an affil­i­ate com­pen­sa­tion or con­flict ques­tion. I want both iden­ti­fied. A line labeled ‘offer­ing expens­es’ is the begin­ning of a dis­cus­sion, not the end.

Use the right denominator

The annu­al $2.4 mil­lion NOI divid­ed by the $40 mil­lion pur­chase price pro­duces a 6.0% acqui­si­tion cap­i­tal­iza­tion rate. Divid­ing by all $43 mil­lion of cap­i­tal­iza­tion pro­duces an approx­i­mate­ly 5.58% all-in unlev­ered NOI yield. They mea­sure dif­fer­ent things. Nei­ther is the return on a $100,000 investor’s equi­ty, because financ­ing and fees have yet to be con­sid­ered. A side-by-side pre­sen­ta­tion helps me see why a com­pelling head­line cap rate may not tell the whole eco­nom­ic sto­ry.

What I would ask the sponsor

Was the prop­er­ty acquired from an unre­lat­ed sell­er? Did an affil­i­ate own it before the trust acquired it? How recent is the appraisal, what is its val­u­a­tion date, and were cap­i­tal expen­di­tures already reflect­ed? Could actu­al clos­ing costs vary from esti­mates? I view these as rea­son­able requests for an expla­na­tion, not accu­sa­tions.

Al’s due diligence perspective

My first check­point is sim­ple: can I rec­on­cile the pur­chase con­tract, val­u­a­tion, total cap­i­tal­iza­tion and equi­ty raise with­out mak­ing assump­tions? If I can­not, I am not ready to move to the pro­ject­ed returns.

Next: Arti­cle 2 — Sources & Uses — Under­stand­ing Every Dol­lar in the DST

Impor­tant Dis­clo­sures: This mate­r­i­al is for infor­ma­tion­al pur­pos­es only and does not con­sti­tute an offer to sell or solic­i­ta­tion to pur­chase secu­ri­ties. DST invest­ments involve risks, includ­ing lim­it­ed liq­uid­i­ty, loss of prin­ci­pal, and non-guar­an­teed dis­tri­b­u­tions. Investors should con­sult their tax, legal, and finan­cial advis­ers. Invest­ment advi­so­ry ser­vices offered through Fidu­cia­ry Cap­i­tal Man­age­ment LLC, an SEC-reg­is­tered invest­ment advis­er. Secu­ri­ties offered through Real­ized Finan­cial, Inc., Mem­ber FINRA/SIPC. Fidu­cia­ry Cap­i­tal Man­age­ment is a sep­a­rate reg­is­tered invest­ment advi­so­ry firm and is not a sub­sidiary of Real­ized Finan­cial, Inc., or Real­ized.