June 16, 2022- DST Education Series B- Part 8 Industrial

Editor’s note- this is part eight of a ten-part series on the various asset types of DST offerings.
Part 8: Industrial Asset Classification Discussion

By Al DiNicola, AIF®
June 16, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, member of FINRA/SIPC

INDUSTRIAL ASSET CLASS
Industrial is one of several commercial asset classes and is also offered by sponsors of Delaware Statutory Trust (DST) . Cash investors as well as 1031 tax deferred exchange investors seek out industrial to add to their portfolios. There are different types of industrial buildings but many of the DST offerings are focused on the larger distribution centers, industrial manufacturing facilities and potentially building that house production facilities. For the purposes of this writing, we will focus on the larger buildings and not the smaller flex spaces (while very popular). The rationale may be the smaller buildings are not in much demand of DST offerings.

Over the past few years and surely aided by the COVID 19 pandemic, the large warehouses have become very popular in all commercial offerings. This may be a Real Estate Investment Trust (REIT) investing in a new distribution center (AMAZON) including a last mile distribution center to a very large (2 million square feet) automobile motor parts distribution facility. The industrial DST offerings may be a single site offering or a portfolio of industrial facilities. The portfolio may also have geographical diversification meaning located in several markets or states. The Industrial asset class has had fewer offerings when compared to the multifamily DST asset class. When offered the Industrial DST asset tend to sell out quickly.

Structure and function of industrial buildings.
Over the past five to ten years Logistics has been a buzz word for describing many aspects of the economy. This is also true on the storage and distribution of goods that are found inside industrial and manufacturing buildings. The industrial buildings are very large and typically there is minimal office space. Suffice to say industrial space is important in all regions of the country. The purpose of this article is to focus on the investment into industrial space. The continued development of manufacturing facilities in the US has had it challenges with many products being made offshore. However, once these products (even though produced abroad) may need to be assembled, stored, and ultimately deliverer to market for the consumers. There is a move to bring manufacturing back to the US known as “onshore”.

Industrial development considerations
Many areas of the country have seen an increase in the development and delivery of industrial space. Most notably the south has seen an increase compounded by increased migration of population. That does not mean other areas of the country are not seeing growth especially along the major transportation interstates. Every product that is purchased in the store or on line may move through many steps while being produced, packaged, loaded and delivered to the final destination. (Although at my home many of the Amazon deliveries are returned, but that is another topic). Where the individual facilities are located needs to be vetted as to the best location to handle the specific requirements of the delivery process or supply chain needs.
Some structures and properties may be owned by the end user of the building but if not, is owned by an investor. The investor then would lease to users of the space. The larger facilities are typically owned by public entities because of the sheer size and cost of the building. These public companies may be REITs either publicly traded or non-traded. Sponsors of DSTs will seek out well located industrial buildings to package the property. These packaged offerings will facilitate the needs of cash investors as well as 1031 tax deferred exchange investors.

Fast facts on Industrial Asset class

  • Location is very important for a number of reasons. Yes- location, location, is still valid.
  • Access to all transportation methods: highways, railways and air transportation should be motivating considerations.
  • Moving goods via truck is a vital primary component of the supply chain. The location of buildings with close adjacency (and visibility) to interstate highways becomes an added benefit.
  • New needs force new designs. Long gone are the days of shaky buildings with outdated facilities (amenities) inside and out. The bar has been raised on what the long-term users expect from the environment. The institutional investors are on board with providing the necessary capital to entice specific users to engage for long term. The end result is an increased appeal for the physical structure which may be a valuable consideration when ultimately sold.
  • The overall size in square footage and cubic volume is increasing. The warehouses (bulk storage) are becoming larger and larger. Not only the building sizes but the overall size of the land mass that permit potential expansion and more truck and trailer storage.
  • Raise the roof! Looking in the rear-view mirror 24 feet clear ceiling height was the standard. Currently the desired height is 32 feet and 36 feet. You may hear the reference clear ceiling heights and that would be calculated from the floor to the ceiling. Higher ceiling means more volume for goods. Recent improvements in the storage capacity of the racks inside the buildings (racking systems) increase the bulk storage capacity (volumetric storage space).
  • The depth of the newer buildings is a factor that is becoming more important. Typical industrial buildings may have a depth of 150 to 160 feet (larger than flex at 120 feet). The newer building may have depth as long as a football field and up to 400 feet deep.
  • There is a need for additional outside space. Occasionally we neglect to consider what goes on OUTSIDE the warehouse. To expedite the movement of goods there have been noticeable changes adding to the efficiency of the operation. There is need of ample tractor trailer storage as well as parking and providing a safe space for maneuvering the big rigs. The need for extra space equates to larger overall sites.
  • There have been building efficiencies improvements including added insulation and other advancement in protecting mechanical components. There may also be considerations for needed air conditioning for the items being stored even temporarily inside the warehouse. Certain buildings may also have dedicated frozen sections as well.

The investment Focus
Nearly every offering Private Placement Memorandum (PPM) includes a section or disclaimer on the COVID 19 potentially disrupting business. Some companies may have increased inventory which currently may create other unintended consequences as the consumer is rethinking their buying habits and needs as a result of inflation. However, AMAZON and others continue to secure well located bulk storage facilities with larger truck courts as well as facilities known as Last Mile Distribution Centers. Many consumers utilize e-commerce and have packages delivered nearly every day to their doorstep. We are all familiar with the delivery vans (originating from the last mile distribution centers) that show up nearly every day of the week to our homes.

Typically, DSTs (and other NNN) require the tenants to take care of repairs. However, there are occasions where the investors or sponsors are responsible for structural components. Those details would be included in the lease agreement along with renewal options, rent increases and other details.

Investment structure will vary depending on the sponsor offering.

  • DSTs are long term assets that may range between 7-10 years.
  • By design many of the DST offerings are structured with leverage. However, there are a few all-cash offerings from time to time.
  • The leverage is non-recourse and may satisfy the investor’s IRS requirements of replacing the debt under the 1031 tax deferred exchange.
  • There may also be offerings with increased debt or loan to value (LTV). By design a higher LTV may be in place to offset higher debt replacement needs.
  • Distribution will vary depending on the individual offerings.
  • There is also a structure referenced as Zero Distribution (similar to a zero coupon). Rather than paying an annual distribution to the individual investors all distributions are dedicated to paying down the loan on the property. The investor may benefit from a lower loan payoff when it comes time for the property to be sold.

Tenant quality

  • The tenant quality may include a local single user to a national credit rated quality tenant.
  • There has been single tenant user who have owned their building for many years and have equity in the property. These users include private and public companies. These users may execute a sale lease back (pulling cash out of the property) and then execute an extended long-term lease. The cash would be used to make improvements to an existing structure.
  • Large users (Amazon, major auto manufacturers, etc.) will make a substantial investment inside the building including robotics to assist in the processing and needs of the business.

Conclusion
Industrial has demonstrated a track record of a stable investment asset. There is a growing need for additional industrial space in many locations throughout the country. DSTs may provide tax favored returns. If you are considering an investment, please consult your financial advisor for additional information.

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. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC

 

 

June 1, 2022- DST Education Series B- Part 6: Single Family Rental & Build for Rent

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

SFR / BFR Asset Classification Discussion

By Al DiNicola, AIF®
June 1, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

SFR, BTR, BFR all offer a new alternative

Over the past few years there has been great interest in the Single-Family Rental (SFR) investment space.  There are public companies as well as private REITs that are investing in SFR assets in a variety of locations in the US. There is a tremendous amount of dollars now being directed in this space. SFRs are generally a collection of existing homes, originally held by smaller investors, (referenced as mom-and-pop ownership) that are being aggregated into larger portfolios of homes.  Some of these portfolios are comprised of over 10,000 to 15,000 homes spread over different geographical areas and locations. You may also consider the SFR portfolio having diversification because of the different locations. The industry has grown up in the past 10 years. It may not be too soon to predict that the current investment into SFRs will transition into DST offerings in the near future. As an asset class the SFR is steady and with no correlation to the stock market. Basic focus for acquisition of homes will be to follow the jobs and rent growth.  The popularity of the SFR rental housing stock continues to increase. Currently this asset class falls under the Multifamily offerings when reporting investment into REITs, LLCs and other offerings.  As a side note student housing and manufactured housing being separated into their own asset classes both were under multifamily reporting.

Emerging Trend 

The Build for Rent (BFR) or Built to Rent (BTR) is an emerging trend where entire neighborhoods (over100homes+) are being purpose built as rental communities. These communities when offered as Delaware Statutory Trust (DSTs) are separated from the multifamily asset classification. Recently a few fully leased up and stabilized communities in the southwest were sold to a large investment firm and repackaged as a DST offering. The offering was fully subscribed quickly. The same due diligence materials and Private Placement Memorandums (PPM) are needed. This repackaging has enabled smaller investors to take advantage of direct cash investment or 1031 tax deferred exchange investing. BFR may be typical single-family homes 1,200- 1,900 square feet or may be much small individual homes. The smaller homes in the BFR space may compared in some way to a “horizontal multifamily” asset class.   The actual property identification may be one property ID and contain 100+ individual detached units.  Alternatively, the 100+ units may each have individual property identification number. Under the DST scenario there would be a master lease and a property manager who oversee the maintenance on the properties, leasing of the units, and needed repairs are handled typically by service technicians.  The BFR which are mainly purpose build and located in one neighborhood may have 50 to over 100 homes plus in one location and many have amenities designed for the rental demographic. Some of the newer communities are also gated adding to the popularity and rental demand.

Lack of Housing

Driving this SFR/BFR and other housing trends are some basic elements.  Some experts believe there is a shortage of housing units as high as four million units and expecting to grow to six million units over the next 10 years.  This tight inventory creates a big supply imbalance. This may create a structural housing deficit. For the large institutional investors this creates opportunity. Institutional money is entering the space with a large appetite for steady returns created by portfolios that are well managed. Institutions are risk adverse and continue to look for yields and steady income. Individual investors may also seek investment into this asset class.

Technology Rules

With technology today SFR that are spread out over a geographic area, maintenance and service calls are routed much like the Amazon or UPS delivery service.  SFR may also benefit from longer tenancy and less move outs helping with down time. With a 2- 3 year move out average this provides for rental bumps as much as 10% versus the average 3-4% annually. The longer lease time may also minimize the turnover cost.

Psychological Demands
What is fueling the psychological demand of the individual renters for the SFR rentals?  Who are the potential renters? Renters who are seeking locations outside of the urban areas are tired of the threat of crime and are seeking the safety SFR locations may provide. COVID also enabled some workers to move outside the urban areas and potentially work from home part of the week. This pushed the market to remote jobs. The original renters were those who must rent by economics. This workforce housing stock should continue to do well and create lower risk to investor because the asset is backed by rent paying tenants. The typical home may be a 1,500 square foot three-bedroom two-bathroom home in the Midwest or southeast built after 1980. Once acquired by the sponsor or investment company, there is typically a capital improvement budget established to improve the living space as well as the structure if needed.  The capital improvements also add to the value of the home.

Demand Drivers
The SFR affords for a detached home, back yards and affordability as well as stability.  The newer renters are interesting and could fall into two main groups.   The BFR are attracting elder millennials (late 30’s) who want yards, good schools for their children they expect to have and to be ‘out of downtown’. A detached home with a small back yard may be one of the advantages providing a small area for your children or pet.  The other group may be the older retired person who does not like living in an apartment and want some degree of separation from a typical apartment.  The types of BFR neighborhoods will come in a variety of styles and offer homes as small as one bedroom up to three and four bedrooms.  Some of the newer communities offer the same amenities as the Class A multifamily apartments. There is an additional advantage renting affords.  Simply put the renters are not tied down to a specific location for a long time.  If there is an opportunity to move to another part of the country for opportunity the renters can simply exit at the end of the lease period.  If an individual homeowner needed to sell their home, there may be a delay in the sale of the home. Although there is a hot real estate market in many parts of the country that may not always be the case. Renting affords the flexibility for certain people.

Effects of Interest Rate Increase
Over the past few months interest rates have begun to inch up which will move the purchase of a new home move outside the each of some buyers. There is a concern by some analyst that the rise in interest rates may slow down the torrid pace of new single-family home either currently under construction or about to break ground. While the first-time home buyer may not be financial able to purchase (mortgage wise) these same potential buyers still need a place to live.  Large equity groups and DST sponsor have capital to acquire these properties and package the real estate into DST offerings.

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). 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. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Disclosure Links

DST Education Series B: Asset Classification Discussion – Senior Housing

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

Part 5: Senior Housing Asset Classification

By Al DiNicola, AIF®
May 25, 2022
DST & 1031 Tax Deferred Specialist

NAMCOA® – Naples Asset Management Company®, LLC

Securities offered through MSC-BD, LLC

Laying the Groundwork

The types, styles, and range of senior housing and services being offered today continues to expand. Unfortunately, the end is in sight of what has been known as the Greatest Generation. The Greatest Generation commonly refers to those Americans who were born in the 1900s through the 1920s. The Silent Generation is mostly a demographic sector of people who were born between mid-1920 and mid-1940s. This generation is referred to as the “silent generation” as the prevailing feelings were that speaking out or participating in activism is dangerous, and that they should focus on careers. This generation experienced the Great Depression and in spite of that many grew into successful prosperous life experiences. You may have heard the phrase “the Lucky Few” as another description of the silent generation. The Todays’ seniors (including part of the Lucky Few) are living longer and want more active lives than the previous generation.  Matching their lifestyle preferences becomes the key to successful developments.

The investors of today are somewhat confused or at lease wanting more details regarding senior housing on what was a niche real estate asset class that is becoming more in demand. This sector is now falling outside of the multifamily asset class where it was a subset. Delaware Statutory Trust (DST) sponsors are actively engaging and acquiring Senior Housing Assets. There is a wide spectrum of offerings of options for seniors that go outside the independent 55 Plus age restricted communities. This is a commercial real estate asset class that provides a much needed and sought-after alternative.  Hopefully we can provide some insight into the differences between ever growing aspect of Senior Housing.

Senior Housing Depth and Breath

Senior housing is more than the traditional “nursing homes”. Investors of commercial real estate are asking questions on the economics of the asset class as well as the options. As compared to 20 years ago, the options for seniors who are more active and healthier continue to expand. There is still a need for extended care for seniors who cannot take care of their daily needs. Some of those seniors need constant monitoring and care on a 24-hour basis.

The breath of offerings of senior housing selections starts with age-restricted single family and multifamily (with a variety of additional options) all the way to servicing the needs for intense care in nursing homes and hospitals.

55 and older age-restricted single family and multifamily properties have been around for a long time.  Of late the activities have increase along with the demands by many baby boomers seeking to extend their time beyond their prime.  The selection of home may include rentals as well as purchase options such as Apartments, townhomes, villas, and single-family homes. Very few 55 plus communities are included in the REIT structure or Delaware Statutory Trust (DST) offerings. Many of these are offered on a for sale bases. Investments into senior housing rely on rental income as a source of revenue. There may be some additional fees that add to the total income for the investor.

Moving up the senior housing list would be independent living facilities. While there may be some similarities to age-restricted housing, independent living facilities tend to cover more programming and amenities, such as restaurant-style dining.  Assisted-living facilities are one step up, providing additional service with daily living activities, such as eating and bathing. Assisted living facilities are regulated and must be licensed to provide medical care.

People with memory-loss conditions require special care.  The integration with assisted as well as independent living with memory care may offer an easy transition for some seniors. Memory care may also be on a standalone basis. Skilled nursing facilities are the most intensive classification of senior housing. These facilities are licensed and similar to traditional nursing homes.

There was good reason to classify senior housing as a separate asset class from multifamily. The senior housing sector is a heavily regulated business. The operator’s experience is critical. Investors need to understand this is an operating intensive asset.  As with all investments identifying the details and underlying economic issues may affect the performance and profitability of any investments.

The Key to success is the Operator’s Experience.

As a real estate asset class senior housing is an intense operating business as well as a local business. DST sponsors totally understand this fact. Prior to an investor becoming interested in investing capital into an offering the critical question is the experience on the operator running the facility as well as the business. DST sponsors may seek out existing facilities where a different management team can boost operations as well as returns.  This will set the table for a successful investment. All real estate contains risk but having an experienced operator helps to stifle or manage the risks.

The demand for an experience quality operator who understands all of the facets of the highly regulated industry is extremely high. There are a variety of compliance issues to adhere to for keeping the business open.

Staff and Labor, the Key Element

The largest line item in the operational budget is labor. Operators who can recruit, train, and retain staff will increase not only the bottom line but the experience of the residents.  The residents are the customers, and their living experience and relationship experience is vital to a successful operation. True appreciation for the staff may only occur when you personally experience a family member living each day in a senior facility. It is expected that the environment (interior and exterior) will be a caring environment that is inviting and warm. The quality of the environment will help to minimize vacancies. There will be policies and procedures in place for the wellbeing of the residents and employees. Systems need to be in place, monitored for compliance and feedback obtained.

All asset classes require operations for success.  When compared to other commercial real estate asset classes the operator risk to senior housing is magnified.  DST sponsors will have operators with deep experience in a position to move into a facility if necessary. This is truly the only way for the senior housing asset to perform to its full potential.

The Demand Components

Understanding the aging trends and local demographics may at first thought of as an easy task.  If an area has a high concentration of aging adults the initial conclusion may be this would be an ideal place to develop and invest in senior housing.  There are more aspects to pinpointing the demand. One key element may be where the key decision makers for the aging adult lives. There is a point in many families where decisions need to be made for the seniors by the adult children. These decisions go beyond financial and include the living accommodations.  Aging in place is a goal many seniors have, meaning staying in their homes as long as possible.  However, there comes a point in time where this becomes overwhelming.  The aging parents may or will move into a senior living facility. There are two age groups to consider:  the aging parents or seniors (over 70) and the age of the adult children (50-65) when evaluating potential demand for senior housing.

Scope of the Demographics

Many initial studies will utilize the typically drive time or mile(s) of radius from a potential facility. The demographic profiles within a three (3) to twelve (12) mile radius should provide an initial indication of need. Urban areas may be shorter than suburban.  There are a list of questions DST sponsors (and ultimately investors) will ask or want clarification.

  • What is the need or potential number of seniors who would be potential users?
  • What are the income statistics (Median household income) for seniors living independently?
  • What are the demographics on the adult children of the seniors (median income and other key elements)?
  • Do the Local housing values indicate a good sign of affordability or wealth?

As with any product offering there needs to be an evaluation of the numbers of households earning above a particular income level (for example $100,000). The other component would be the future of this demographic meaning is this group increasing or declining within the geographical local area.

What are the Sources of Income?

Understanding who the residents (or tenants) of the facilities is very important to understand. Recent statistics show the median income for seniors over 75 years of age is 54,058 per year. The median net worth is $254,800 (average is $977,600). Each senior housing complex may have a variety of services besides rental payments (some may exceed $10,000 per month). As the need for care increases with memory care cost may increase. While there is a need for many types and styles of senior housing facilities most DST offerings seek out primarily private pay.  Having said that many facilities have state requirements to include submarket rents (Medicaid).

Suffice to say that collecting Social Security benefits (most seniors will receive), this will not cover the full costs of senior housing.  There needs to be other sources of income. The analysis and due diligence process DST sponsors engage in becomes the key decision factor.   Seniors who have retirement accounts, pensions, savings accounts, stocks, and bonds create a financial foundation. In addition, the sale of the senior’s resident (and other real estate), vehicles may create additional income. There may also be long term care insurance policies providing support.  As a last parachute may be the adult children’s’ financial assistance.

When looking at offering statements and financial models DST sponsors are very interested in the percentage of rental payments coming from private pay vs. Medicaid residents.  Can the private-pay residents’ current and future income cover the rental payments and other services provided by the facility? Bottom line for DST sponsors (and ultimately investors) can the target market who would move into the facility create a sustainable income stream.

There is always Market Competition

There have been tremendous advances for a movement called “aging in place”.  Aging seniors want to stay in their own home (aka age in place) in their familiar location community and close to friends.  Moving hundreds of miles away may not be the preferred option.  When attempting to acquire or develop a new facility, or any product, looking at the competition in your submarket is a key point to understand.  DST sponsors will look at competitors’ occupancy rates, mix of living units (studios, 1 bed, etc.), mix of care units (independent living, assisted living, memory care), comparable rents, and other elements.

Conclusion

Senior housing has been elevated into a more mainstream product type and no longer listed as a specialty asset under multifamily product. Senior housing is attracting attention from DST sponsors and institutional investors. The interest in senior housing should continue with Americans living longer. DST sponsors believe that there will be an increase in interest in senior housing. First steps for DST sponsors is to understand the business and economics of senior housing. Similar to all asset classes there is a complete underwriting and third-party reporting on the DST senior housing offerings.

 

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). 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. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

 

Educational Series B- DST Asset Classification Discussion

Editor’s note- this is part one of a ten-part series on the various asset types of DST offerings.
Part 1: Asset Overview.

By Al DiNicola, AIF®
May 5, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

At times there may be difficulty in connecting the terms or words Delaware Statutory Trust (DST) to the underlying asset that may comprise the investment portfolio. DST Assets are the same as commercial asset classification. Part of the disconnect may be with the words “trust” and then when you layer in “Delaware” and the word “statutory” it evokes an aurora of confusion sorting through the structure.

The DST structure started around 2003 when an investment real estate company from Chicago (name available upon request) petitioned the IRS to create another structure of fractional ownership other than the Tenants in Common (TIC). The intention of the petition was to create a structure that may limit the financial exposure for the individual investors. There are many differences between the TIC structure and the DST structure. TIC structure has investors personally responsible for any debt associated with the real estate. The DST structure includes non-recourse debt to the investor. The other component of the DST is an increase in the number of potential investors from thirty-five to a larger number.  A larger number of investors increases the amount of potential funding.

In a TIC environment to purchase a $35 Million asset each investor would need to contribute $1 million each. With an expanded investor pool the DST sponsor may have the ability to raise the same $35 Million but offering would include many more investors at a lower investment threshold. Lower threshold may limit individual investor exposure. A lower threshold may also satisfy the needs of smaller investors seeking to complete a 1031 tax deferred exchange. TICs are still available as a 1031 solution but may not be the first solution for a 1031 exchange utilized for many reasons. We will cover the differences between the TIC structure and the DST structure in detail in another writing.

Investors who have invested in commercial real estate over decades now are more than tipping their toe into the waters of Delaware Statutory Trusts. In 2021 nearly $8 Billion have been in alternative real estate which was more than the previous two years combined. 2022 may exceed the record-breaking year of 2021. Many of the same investment criteria used by investors on traditional real estate acquisitions are used for evaluating a DST investment. In a previous Educational Series, we covered many aspects of the DST structure.

Since the twenty-year evolution of DSTs there have been as many as seventy sponsors of DST at one time prior to the great recession.  Currently there are approximately 35-40 sponsors with a variety of types and styles of offerings. DSTs may also be found in various locations throughout the USA. Some types of DST may be referenced as the asset class. The asset may be in an individual location or include multiple locations if the offering is structured as a portfolio. The portfolio may be within one state or in different states. At any given point in time there may be $500 Million of available DST equity to a Billion dollars of equity.  We track most of the major sponsors (potentially 25-30) at any given time. Tracking becomes somewhat of a constant monitoring on an ongoing basis. A sponsor with $15 Million of equity may last just a few weeks and the remaining balance can be acquired by a few larger cash and/or 1031 exchange investors. Larger offerings (above $50,000,000) may be available longer simply because of the offering size.

Overall asset classes as mentioned previously are the same as traditional real estate ownership.

  • The list would include Multifamily (most often apartments), and all the former subsets of multifamily that include student housing, senior housing, single family rental communities, and manufactured housing communities.
  • The industrial sector may include distribution centers as well as the popular last mile distribution centers.
  • Operating companies such as manufacturing companies (some credit rated public companies) may offer triple net structures.
  • There are medical office buildings (MOB) that are small to medium size and may include portfolios.
  • Necessary retail that may be large facilities may include such recognizable names as Wal Mart neighborhood centers, Cabala’s Bass Pro Shops, etc.
  • Self-storage facilities offer single sites as well as portfolios.
  • The office sector may be structured as a typical DST with a distribution stream or other structures offering special benefits to satisfy investor needs.
  • There is a new subset of office called Life Science.

The DST offering maybe an all-cash investment or may be structured as a leveraged offering. All cash investment eliminates the risk of foreclosure of the property. Many investors do require some leverage to comply with the 1031 tax deferred exchange rules. Other investors enjoy leverage to increase the return potential. The Loan to Value (LTV) will be disclosed within the Private Placement Memorandum (PPM). LTV may range from 0% (all cash) to as high as 85% in what is specifically designed as a Zero Coupon Offering.

Frequently we recommend to investors to consider diversifying their holdings by asset class, and geographic locations.
This naturally depends on how much cash is allocated to the investment or the amount of the 1031 proceeds that need to be reinvested. Typically, the minimum investment amount is $50,000 for cash investors and $100,000 for 1031 tax deferred exchange investors. Identifying the assets for cash investors typically is easier. Cash investors are ready, willing, and able to submit paperwork to secure their investment. 1031 Exchange investors may be limited by the closing date of the property they are selling. Prior to the 1031 investor closing on their relinquished property there may be review and due diligence perform on the potential asset.

However, many sponsors may want the 1031 investor to be “in cash” prior to submitting paperwork that reserves a position or portion of the sponsor’s DST offering. In cash means the 1031 investor has closed on their relinquished property and the qualified intermediary (QI) has the proceeds of the closed relinquished property. Thus starts the critical 45-day identification period. This may be a stressful period of time.  However, with some pre planning on asset classes and underlying needs and suitability criteria, we hope to provide viable options for the investor. Options change depending on the current inventory of DST available at any given point in time.

We will expand on all the asset classes in future sections of the Educational Series B DST Asset Classifications

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). 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. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Cash and 1031 Proceeds Seeking Placement

April Landscape Summary “Cash and 1031 Proceeds Seeking Placement”

BY Al DiNicola May 10, 2021

After an outstanding beginning of 2021 with a reported $1.5B of equity placed with DST sponsors, some advisors felt as though the velocity was left over from 2020.  2020 is so far in the rear-view mirror and now investors may wonder how to position their real estate assets for the future.  There are a few concerns for investors with regards to selling their property especially when the task of locating a replacement property seems overwhelming.  The DST sponsors are securing additional properties to facilitate what may be the biggest year in DST equity investment.  Based on an outstanding first quarter and continued investment in April the industry may well move over the $4.25B equity investment mark. Considering that most DST have a debt component by design (average of 50%) that would indicate $8.5B in DST purchases.  Mountain Dell Consulting reports the outstanding success in a variety of asset classes.

  • The top three equity raised for Q1 2021 are: Multifamily $600M (51.24%); Industrial $178 M (15.23%); Retail $166M (14.21%). Multi family tends to lead the pack for a variety of reasons. MF has been the preferred asset class and also has the largest supply of properties.  The Industrial sector with the distribution centers is much sought after but there is limited supply.  The retail asset class consists of necessary retails grocery, neighborhood drug stores and larger properties including kidney centers and neighborhoods discount stores.
  • Multi-manufactured housings asset class is a new separate asset class (was split out from Multifamily) and raised $60M. Look for more institutional money purchasing manufactured home parks in southern states as long-term ‘mom and pop’ owners sell.  Self-storage continued with a limited number of offerings and raising $54M. Surprisingly, Office raised nearly $50M.
  • Office medical is starting to rebound with $31M. The Multi Senior Housing $17M and Multi Student Housing $9M. All of these asset classes were affected more than other with COVID.  Accessibility to due diligence as well as limited new supply on the market may be corrected in the near future. One note on Student Housing would be to monitor the increase in enrollment in colleges as a return to normal may boost enrollment.
  • These are all first quarter results. 2021 is shaping up to be a “fast and fluid” year form the standpoint of equity or cash being available.  Cash from sponsors to acquire properties and proceeds from 1031 investors and straight-out cash investors.

However, there is an investment elephant (or donkey) in the room.  As many investors understand there are discussions on what President Biden may or may not due with regards to raising the necessary capital to pay for his programs.  Over the past years the 1031 tax deferred exchange (not a loophole) has been the subject of modification and even thoughts of elimination. President Biden has also floated and proposed the idea of doubling the capital gains tax, eliminating the step up in basis upon transfer upon death to the heirs as well as a few other potential eliminations including raising the top tax bracket. Many of these programs have a dollar amount of either gains, profits or other exclusions for certain income earners.  Family businesses and farmers may also have special exemptions. We will continue to write about these items in future articles.  DSTs may provide diversification and restructuring of investor assets to fall under the projected dollar amounts. The good news are these unknows as well as how the red-hot real estate markets in many parts of the country are leading property owners to become sellers.  The rationale is to sell now, lock in profits, seek replacement properties and hopefully be grandfathered in on the current tax situation.  DSTs are becoming the new alternatives because of the tax favored returns as well as the turnkey solution the provide. Commercial real estate brokers are recommending the DST as the replacement solution for their sellers.  Commercial Real Estate brokers are not able to offer a DST unless they have the necessary qualification and security license. Property owners are becoming sellers and there is a buyer ready to close.  Investors should always consider their alternatives and DST are not for all investors and you must be an accredited investor to purchase a DST.

Once a property owner close on their property being sold and the qualified intermediary is holding the sales proceeds then the “fast and furious” 45 days starts to identify properties. A strategy may be to have a conversation with an investment adviser two to three weeks ahead of the closing on the real estate being sold.  This could line up a potential asset class and a few options to consider.  The DST are tracked similar to real estate as Days on Market (DOM).  In 2020 the median DOM was 164 days across all asset classes.  In 2021 the medium DO is 75 days.  Naturally certain assets with smaller offerings (under $20M) may only last a week or so.  While other larger offerings $150M may take longer to be subscribed. We, as advisors, track the DST offerings continuous can make recommendation on potential position, diversification, and geographic locations. We also balance the necessary cash reinvestment (being held by the QI) as well as securing the balance of debt (if applicable) as required by the 1031 deferred process.

April was an outstanding month for DST investment and as we move into May and the Summer the key will be available DST offerings to satisfy the surge in demand from cash investors and 1031 Exchanges.

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@dst.investments.

Any information provided has been prepared from sources deemed to be reliable but is not guaranteed to be a complete summary or statement of all available data necessary for making an investment decision. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Any information provided is for informational purposes only and does not constitute a recommendation.  DST 1031 consulting advisory services may be offered through: NAMCOA® – Naples Asset Management Company®, LLC | 999 Vanderbilt Beach Rd, Suite 200 | Naples, FL 34108.  Direct:  239-691-8098

www.NAMCOA.com  Firm Brochure (ADV2)    Securities may be offered through MSC-BD, LLC, Member of FINRA/SIPC.  CRD #142927.  NAMCOA® and MSC-BD, LLC are Independently owned and operated.

2020 DST Year in Review ” Winners & Winners”

February 10th, 2021

Many financial advisers subscribe to a variety of industry newsletters, affiliations and webinars to take a deeper dive into the alternative real estate investment asset class.  There are plenty of analyst who spent a great deal of time identifying the effects of the COVID pandemic.  Recently Mountain Dell Consulting, LLC (an affiliate of Orchard Securities, LLC) shared their findings of 2020 equity raised for Delaware Statutory Trust (DST).

The comparison from 20219 to 2020 is interesting since there was still over $3B in equity raised.  2019 equity raised was $3.486 Billion compared to $3.192 Billion in 2020. An outstanding year when the market disruptor of COVID sidelined many of the activities to bring assets to the market.  End of first quarter and second quarter prohibited the availability, acquisition, inspections, and closing of assets to put in the pipeline. 2020.  Glancing back to 2018 equity raised results of $2.48 Billion the amount of equity in 2020 was outstanding.  Investors placed their equity into DST as an alternative to traditional brick and mortar real estate for a variety of reasons.  Basically, DST equity created a “win-win” when evaluating the results. Both cash investors as well as 1031 Tax deferred exchange investors all benefited.

The results by asset type are worth identifying with a few comments.  In some cases, the amount of equity may be as a result of assets not being available for investments.  Multifamily which continues to be the largest asset class and the equity raised was within $1 Million of the 2019 total represented 51.12% of all equity representing $1.631 Billion. In the future Manufactured housing (currently a subset of Multifamily) will become its own group.

Retail equity investment was up $20 Million year over year. The retail offerings were limited but when made available investors seek this asset class.  The necessary retail asset class should continue to do well. Retail represented 15.64% of all equity with $500 Million raided.

Self-storage continued to have limited new offerings coming on the market and the relative size of the individual asset are smaller than other asset type. Self-storage was down only $8 Million year over year. Storage raised $231 Million and represented 7.26% of all equity raised.

Industrial asset class (also in limited supply) was about even year over year.  This asset class also includes the distribution centers and with limited offerings are subscribed quickly. Equity raised was $207 Million and represented 6.50% of all equity raised.

It comes as no surprise that Office was going to be under a microscope with the COVID effect and the work from home requirement.  Office was down $40 Million but still raised $159 Million in 2020.  This represented 4.99% of all equity raised.  There continues to be a limited supply of Office asset type. There are many people still working from home because of COVID and the future of the asst type may be limited.

Senior Housing was very surprising to me as the asset class was up $50 Million year over year. This asset class is a small part of the over all results with 4.37% and $139 Million raised.  The Senior Housing sector continues to seek clarity on protecting the residents as well as the staff who work and operate these assets.

Medical Office may have seen the largest reduction year over year. This asset type was down $155 Million.  Representing 3.61% of all equity with $115 Million the asset type has limited offerings.  There will still be offerings brought to the market. Medical office will seek to identify the right combinations of location, services and solutions.  With an aging population medical office will continue to evolve.

Hospitality (hotels industry) suffered greatly under COVID with the entire travel industry being sidelined and has not totally bounced back. However, there as a limited amount of Hospitality DST offerings and year over year was down $20 Million.  This asst type raised $69 Million and represents 2.18% of all equity raised.

There are bright spots on the horizon for student housing in the right locations. Colleges and universities located in value location (where tuition is reasonable) will see continued interest in student housing offerings. The unit configuration will evolve to protect students. The final thought will be COVID bounce in college enrollment anticipated by many college administrators for the fall of 2021 and into the future. Student housing raised $69 Million in 2020 and represented 2.18% of equity raised.

2021 is off and running and has a tremendous back log of cash investors as well as 1031 exchange investors.  There may be a total of $4 Billion in equity invested in 2021.  Sponsors are adding to their pipeline of assets that will be offered to investors.  Cash Investors will benefit from being able to invest as soon as the asst is offered by the sponsor. 1031 exchangers are somewhat challenged with certain assets being in high demand. Financial adviser who properly position the 1031 exchangers/investors ahead of the closing on what many referenced as the “down-leg”. The down leg is the selling of the existing property.  Timing is key and 2021 will see outstanding results with DST equity investment.

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@dst.investments.

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.   DST Investments, 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. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041