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

December 2020 Experiences Brisk DST Activity

Al DiNicola

January 15, 2021

Over the past year we have provided an overview of the types of DST that are being offered. This 30,000-foot view for accredited investors is called the Landscape Summary.  We interact monthly with many of the major sponsors of DSTs and provide updates on the availability of offerings in numbers of programs, equity as well as other components which many potential accredited investors (through their feedback) state is important.

When looking at the numbers month over month there may be some changes on the dollar amount of availability with some of the most notable months have $100,000,000 changes in the equity when viewing the results. The December numbers have a notable change from November in the amount of $150,000,000 less equity.  However, that is only part of the results.  Within the activity from sponsors and investors there was a tremendous change.

Sponsors often will grant financial advisors and representatives the ability to reserve a position for an investor for a limited period of time. The sponsors wanted to complete as many subscription agreements (typically step one) and then close on the transaction (step two). Many investors seeking to close before year end reaffirmed their reservation positions and closed on their cash positions. In the case of 1031 exchanges investors executed (closed) well ahead of the 180-day required closing. As a practice we assist 1031 exchange investors with identifying their potential replacement properties ahead of their actual closing on their current property. (Occasionally the sale of the current property is called the “down-leg”).   Upon the actual closing of the down-leg a good strategy is to have the 45-day identification list ready for submission to the Qualified Intermediary (QI) or Accommodator. The other part of rationale for this strategy is since the DST availability changes on a weekly basis.  New issues that come out may be quickly subscribed. The other rationale comes from the investor who may want his down-leg proceeds reinvested sooner rather than later. Almost all our clients identify as soon as possible and most close on the replacement property (occasionally referenced as the “up-leg”) prior to the 45-day period and in some cases with 10 days of their down-leg closing.

The back story would be investors wanting to close as soon as possible to put their funds to work rather than sitting in the QIs account, as well as the sponsors wanting to close as many positions by year end.  During the month of December, in the offerings we review, there was over $350,000,000 in closed offering positions reported. In the beginning of December there were 32 available DST offerings and 18 were reported either fully subscribed or over reserved. When looking at the current available DST Equity (and this changes weekly) there is about $420,000,000.  The sponsors were also very busy with filling the pipeline with replacement offerings.

Creating the DST pipeline takes a lot of work upfront. We have good working relationships with many of the sponsors. Financial advisors who specialize in the DST space will receive advanced notice of potential DST offering that may be available in the near future.  This provides us (as well as other advisors) the ability to properly align our investor needs with the best potential cash investment or 1031 replacement property. The multifamily options (including the manufactured housing offerings) dominate the list of properties with a consistent 50%+ of the available equity. The industrial space is often sought after especially if there is an Amazon involvement. Necessary Retail has also been very popular and becomes fully subscribed quickly. Senor housings has not seen an uptick in offerings.  However, the 55 Plus offerings seems to be popular.  There is a difference between the assisted living (senior housings) and the active 55 Plus. Student housing has seen limited offerings because of the campus situation still lingering with the COVID situation. Colleges are attempting to figure out the dormitory and campus housing solutions.  There may be a few exceptions where there are population shifts into states. Student housing is similar to multifamily in design and structure in some regions.  For example, there is a migration of companies from California to Nevada.  Many of the younger workers are moving into the student housing properties that offer internet connectivity and other lifestyle components.  These new student housing offerings are different housing options then when many of us went to college. Florida is also benefiting from the general population shift from the northeast (NY, NJ, CT) to the sunshine state.

What is the forecast for 2021?  Sponsors will still be looking at bringing online multifamily opportunities. The industrial space and distribution should remain strong as well as the necessary retail. Select manufactured housing offerings as well as the 55 Plus will be offerings to watch. Assisted living and student housing may be very limited. Medical offerings which have been limited may have an uptick.

We are awaiting the new administration’s plans for the country.  There has been speculation that Mr. Biden’s plans include some changes to the 1031 tax deferred exchange.  Please look for our next blog article on the unintended outcomes if the 1031 exchange in altered or eliminated. Currently the cash investors are seeking tax preferred returns and the 1031 Exchangers are seeking to utilize the benefits provided.

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

December Year End Will Experience a Flurry of Activity

Al DiNicola

December 5, 2020

It has been stated so many times this year that 2020 is a year like no other with many factors. These factors include many effects from COVID issues, business uncertainty, shifts to working at home (rather than being in the office), parents assisting children with at home classroom, and the overall economic changes the country and the world is dealing with this year. In addition, there is a change in the political scene and climate in Washington.  At the same time there are sectors of the economy that has responded to the challenges and created opportunities.  The online economy and the delivery process of all the in-home shopping has energized certain businesses.  The end of the year traditionally creates a push or rush to settle certain tax and investment positioning continues to be a goal among investors, buyers and sellers.  The Delaware Statutory Trust (DST) environment will be no different.

Sponsors, working with financial advisors representing investors, have secured reservations and indication of interest in many assets

and properties.  These assets may represent single properties or may be portfolio of assets (from 2 properties to nearly 20 properties).  The assets that may be smaller offering, under $20MM may have a shorter “runway” for potential investors.  Runway meaning how long an investor may have to identify and ultimately close on an identified property. Larger offerings, over $50MM provide longer periods of time.  This longer period of time may assist investors who are engaged with a 1031 tax deferred exchange especially if the investor is anticipating on closing and not within their 45-day identification period.  Cash investors or 1031 investors who are already “in cash” do have an advantage with the ability to close.  In Cash references the 1031 funds are already being held by a Qualified Intermediary (QI).

The multifamily sector continues to have the largest availability for investors.  If we look at a total of twenty DST offerings 10-12 may be multifamily. The balance is comprised of industrial/distribution center, senior housing, student housing, medical, necessary retail and manufactured housing. The multifamily sector continues to have great appeal to many investors especially in the geographic regions that continue to see increased population such as Texas, Nevada, Tennessee and Florida. There are specific examples of infill locations that may be considered trophy locations. When multifamily dominates the offering selection there are the occasional high demands for other asset classes such as industrial/distribution. Many of these offerings are associated with the “Amazon Factor”. This factor represents the supply chain associated with the online shopping increase. The online increase not only was evident before the COVID with a shift away from the shopping center or mall experience, but also with the COVID restrictions.

The interaction between the sponsors and financial advisors is critical for obtaining the right asset for the inve

 

stors. Sponsors who are preparing to close on the initial acquisition of the property by year end will see continued interest not only by year end but moving into 2021. There will be a push to close as many cash positions as well as completing the 1031 exchanges.  Currently 1031 exchangers anticipating closing on their “down-leg” (property they are selling) in December, may seek to have a quick turnaround and close on their “up-leg” (replacement property) by year end. While this is possible it requires financial advisors identifying the best replacement solution that have available equity.  Especially with the ability for the spo

 

nsors’ closing department having the capacity to handle all the paperwork necessary for completing the transaction.

Sponsors have also been able to communicate to the financial advisors of upcoming releases.  Recently we were fortunate to position investors with specific requested assets prior to the actual release of the assets. This was done with indication of interest or reservations. This helps the cash investors but more importantly the 1031 exchangers with knowing the replacement property. Frequently investors contemplating selling their real estate holdings may resist not knowing what property will replace their current real estate.  The DST has provided an easy path to solving the replacement property dilemma

2020 will go down as an unusual year.  What will remain constant will be the success the sponsors and investors have experience.  Sponsors will report an outstanding year in volume of equity invested as well as the value of real estate that has been sold.  We have enjoyed prov

 

iding the monthly landscape update on the DST markets. We also appreciated all those who have engaged in conversation with us sharing your questions as well as encouragement.

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

Performance of Retail DSTs during COVID

COVID has changed business operations in many ways. We have covered the effects on Delaware Statutory Truct (DST) offerings including multi family, student housing and other asset classes over the past few months. The headlines on the news may point to the effects on retail and how many retail locations are either closed or at best struggling.

When you mention the asset class “retail” what comes to mind, for most people, may be the stores that are seen in the malls, strip centers and stand-alone location struggle to compete against Amazon. There is no question that Amazon (and other delivery options) have challenged the existence of the everyday retail establishments. The strategy for the “Retail DST” offerings would be to aggregate those businesses that are considered necessary operations and satisfy everyday needs of consumers across all economic sectors. In addition, the geographic location of the DST offerings may be across several states along with a variety of loosely associated types of businesses.  The assembly or aggregate business may be CVS, Walgreens, drug stores, Dollar General, grocery stores, and supply stores that are needed to sustain on going businesses.

These businesses are not 100% Amazon proof (concept that there may be a business or service Amazon cannot immediately provide) but are in areas where the demographics prove the locations provide consistent year over year increase in same store sales. In addition, the location of the stores, from a real estate prospective, provide a stable location in the event the business would move out and another tenant would release the space.  In some cases, the DST offerings are referenced as “Trip Net” of NNN opportunities.

Just to be clear, let’s look at the question, What Is a Triple Net Lease (NNN)? According to Investopedia, “A triple net lease (triple-Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities, and all payments are typically the responsibility of the landlord in the absence of a triple, double, or single net lease”.  This means the owner/investor is not responsible for those items.

The Sponsors of the “Retail DST” or “NNN DST” will assemble a select collection of necessary service stores in a variety of location and package together to offer an above average return with a risk profile typically spread across a wide geographic location. These DSTs may provide a higher yield over a publicly traded REIT. In addition, the DSTs may have longer terms leases with almost 100% investment grade tenants. A publicly traded REIT may have only 25%- 50% investment grade tenants and rely on discretionary retail tenants to round out their portfolio.

DST Sponsors may focus on the necessity retail space including the health care space.  This strategy may also create a higher yield as well as more secure dividend yield. Remember not all investments are guaranteed. This DST strategy will become more attractive when it the time presents itself for an exit out of the DST or sale.  At the end of the DST term the portfolio may be very attractive for acquisition by an institutional REIT and add additional stability to the REIT’s portfolio adding to their investment grade concentration.  For the REIT, that acquires the DST credit grade assets, this acquisition may increase the yield it may pay their investors. The other attractiveness of the DST structured NNN may be the laddered leases with different expiration terms and the timing of the Debt Maturities (use of leverage as in most real estate acquisitions). The use of Broad Diversification also adds to the attractiveness for the DST exit strategy.

The COVID effect- Before and during COVID the DSTs providing essential retail sector of the market performed very well.  All retail operations instituted the prescribed safety measures with cleaning, social distancing, signage and other safety measures to ensure the public access to the stores. Because of the national credit standing of many of the asset contained in the NNN portfolio incomes were stable thus permitting an uninterrupted cash flow to the investors.  However, the effects of COVID on the public perception as well as the avoidance of in-store visits by shoppers, many facilities needed to institute curbside pickup and potentially delivery services.

Last week we fielded a call from a potential investor regarding debt service ratio and the effects on investment.  If you were applying for a loan for a rental property, the lender may look for a certain debt service ratio.  For every $1.00 of debt the lender may require $1.50 in rent collected.  In this example, the debt service ratio is 1.5.  In some of the Retail DST offerings the debt service ratio is 2.5 or 2.9 meaning for every $1 of debt there is $2.90 collected in rent. This enable Sponsors the ability to provide a consistent cash flow to the investors.  The challenge may be securing a position in a NNN DST.  The availably is small in comparison to the multifamily DST options. DST News, https://dstnews.org/ provides an overview (for accredited investors) to preview a sampling of the types of DSTs offered   Currently in the sampling Retail comprises about 8-9% of DST and Multi Family over 50%.

Based on feedback, the investors utilizing a DST (coupled with a 1031 Exchange) are looking for four major items: capital preservation, stable income, tax deferral, and an exit strategy.  The NNN DST is one asset class that may provide the investor all these items.

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.

August 2020- COMMENTARY: OVERVIEW OF THE DST OFFERINGS

By Al DiNicola, DST Investments, LLC

August 25, 2020

Last month the focus was on the $200 MM of DST investments made by individual investors.  August continued to see additional investment as DST offerings were funded. Many eyes are focused on the response of the Sponsor in securing additional properties and structuring into offerings for the large anticipated number of individual sellers of real estate prior to year end. The old phrase the “Dog days of August” did not really exist in the acquisition teams of the Sponsors. During the height of the COVID restricted activity, many due diligence teams could not physically inspect the properties that were the subject of future acquisition. Without following the strict compliance of evaluation of every property that would ultimately be offered to individual investors (either cash investors or 1031 exchangors) the investment would not be sound. Many of the sponsors have multiple DST properties in the process of final evaluation.

Many Sponsors are continuing to experience good rent collection results considering the current responses (moratorium) by states on eviction of renters who cannot pay the rent or choose not to pay the rent. The suspicion may be that the multifamily sector, as well as student housing would see a drastic drop in rental collection. Contrary to that suspicion, many have seen strong occupancy as well as strong rental collection. Even in areas like Las Vegas rent collection have been strong. As the colleges continue their individual decision on how to operate college classes (either in person or virtual) private student housing is seeing an uptick in leases signed.  Many students are returning to the college towns even though the future of classes and college athletics are in flux. These two sectors (multifamily and student housing) make up nearly 60% of all DST offerings. However, the core competencies of each offering need to be strong. Meaning once we are on the road to returning to more businesses opening (such as in Las Vegas) are the demographics positive, are businesses expanding and hiring employees, and are the assets or properties those that would attract renters.  The essential businesses in the retail sector continues to be stable. Food stores, pharmacies and the local economic drivers continue to have be demand. Industrial and self-storage are stable but new offerings have been slow to enter the pipeline. Many of the self-storage offerings have been relatively small (under $15 MM each) and are subscribed quickly. Medical and senior housing are still attractive.

The sponsors re active in getting new assets in the pipeline.  Sponsor are completing the pre closing DST due diligence and expect to have multiple offerings coming on the market in the beginning of September.  There continues to be equity and liquidity looking to purchase new DST offerings.  Many investors will be seeking to balance their real estate holdings by end of 2020.  Look for a robust 4th quarter.

Our DST Landscape Survey provides a snapshot of comparative data representing most available DST offerings based on actual data provided by DST Sponsors.  This landscape survey is updated in real time as Sponsors provide updates on current properties and on their new DST initiatives. 

 For more information, please email us support@dst.investments or phone 800.378.0515

DSTs are for accredited investors only. DST as well as all real estate investments carry risk. This is not an offer to purchase any security and all purchases must include a Private Placement memorandum (PPM) Please consult your CPA for questions regarding qualifications for 1031 tax deferred exchange

IRS 1031 Deferred Exchange extension expires with sell out and funding of many DST offerings.

By Al DiNicola

August 8, 2020

DST Investments, LLC

Securities offered through MSC-BD

The COVID extension of the IRS 45-day identification period as well as the 180-day closing time period has expired on July 15th.  The extension was provided considering the virus that affected the ability to inspect properties and conduct necessary adherence to certain contract provision. Some lenders may have pulled back on funding for buyers of the 1031 disposed properties. Other real estate investments (under contract) have seen some concerns for occupancy  and income generation required by lenders.

Weekly we track the equity that is available for investment into DSTs from the major DST sponsors.  This includes both all cash DSTs and leveraged DST. The results from the past month (with the expiration of the July 15th date) has seen an investment of nearly $200 MM of equity into a DST. This does not include investments in other alternative real estate investments (Opportunity Zone Funds, REITs, etc.).  Alternative Real Estate investment may still provide financial solutions for investors seeking non 1031 exchange solutions.

Sector allocation followed the tradition investment path with multifamily holding the top position with acquisition by individual investors.  Many sponsors are reporting strong, consistent rent collections. Multi family provides over 50% of the offerings and investment.

Student housing sponsors (making up about 10% of the offerings) also are reporting additional rental applications and signed leases in certain location. On the surface when we think about student housing with relation to colleges potentially operating online courses rather than in person, we wonder why anyone would be near campus. Students are not returning to their parents’ home and the students want to be near the colleges even if taking online classes. Colleges already started to de-densify the dorms as we mentioned in last months’ article.  Basically, eliminating the four-bedroom two bath dorms and having bedroom/bathroom parity (meaning a bathroom for each bedroom) resulting in students, in some cases 40%, being forced out of the dorms.  In addition, with colleges offering online courses many of the dorms may not open.  Thus, leaving new freshmen who traditionally are on campus to seek off campus housing.  This is causing an uptick in private housing leases being signed.

The retail sector that contains the core businesses with essential services performed well through COVID. Some of the offerings are well diversified in geographic locations.  Self-storage seems to be performing well including single location facilities and multiple location offerings.  There are limited industrial offerings and seeing brisk acquisition by investors.  Bottom line, many offerings were funded within the last month. Whether there was a backlog or normal investor acquisition there is a demand and need for additional DST offerings.

The question to answer may be what will happen the balance of the year?  Sponsors have been in engaged in due diligence (with the COVID restriction) to provide assets for acquisition for investors for strategic planning.  COVID restricted the physical inspections, appraisal and other necessary due diligence required to prepare an asset to be acquired by the sponsor that would be offered to investors. Sponsors obtaining assets and getting those assets in the pipeline will enable individual investors selling their real estate (through a 1031) and potentially closing on that real estate by year end to complete the 1031 exchange.  The interest rates are favorable for both purchasers of investors’ assets (qualifying for the 1031 exchange process) as well as the sponsors of DST obtaining favorable loans for the leveraged assets. As a reminder a DST with leverage (loans) are non-recourse to the individual investors.  Sponsors are working diligently to have assets or properties on the market by mid to late September for the typical year end closing targets.  There may also be an inverse relationship between investors seeking a specific asset class.  For example, if there is a limited supply of “all cash DSTs”, industrial or self-storage those opportunities may be subscribed quicker.  The multi family assets while in great demand also have the greatest supply. As a side note an “all cash investors” do acquire leveraged DST for the same reasons why a buyer would purchase real estate using a down payment and a mortgage (which may require the buyers to guarantee the loan).  The buyer would control a more expensive property with a potential greater overall appreciation.  With the exception a DST does not have any investor recourse as in the case of a buyer obtaining a mortgage.

Investors who can properly prepare their current investment real estate property for sale and close by end of year may have an advantage in acquiring a DST replacement property utilizing a 1031 exchange. An IRS 1031 tax deferred exchange is an exchange of like kind investment properties, which enable taxable gains to be deferred on the property that is sold. There are specific time constraints on the identification periods and closing on the replacement property. DST provide an alternative for diversification and are scalable for what ever amount is needed for the replacement property as well as satisfying the debt replacement is needed.

All real estate acquisition and ownership are not without investment risks. Remember that all investments carry risk and investing in real estate and DST properties also carries risk. There may be declining market values, liquidity issues and interruption to potential cash flow. Investors need to seek advice with their CPAs and other professional for guidance and advice.

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.

Student Housing Insight

By Al DiNicola

DST.Investments, LLC

Securities offered through MSC-BD

July 23, 2020

The colleges and universities were first to make a major statement with regards to the COVID pandemic.  Many across the country could not believe the NCAA March Madness tournament would be cancelled. Like all others in the country (and around the world) we have entering new territory in all facets of our lives.

Over the years the stability of “universities” has been noted as an institution. These pillars of stability provide a path for many seeking higher education, social interaction as well as avenue to showcase their talents as in the case of the athlete. COVID’s impact on college sports will be the in future discussions.

Student housing, from an investment point of view, has provided stable returns especially in non-commuter schools.  Student need a place to live as well as keep the belongings they have moved out of their parents’ home. That is the big picture. Many advisers are bullish on student housing with sustainable occupancy.  The amount of student debt being taken on is another topic but suffice to say there is lending available for many students to go to school.

What were the outlooks prior to COVID? The student housing sector has been one of the strongest investment sectors and there has been institutional money deployed in this sector. The DSTs that have been structured in specific locations have done well over the years. (Many investors have utilized a 1031 tax deferred exchange with a DST as a replacement property). During recessions colleges and universities have seen an uptick in enrollment as people seek to obtain new skills.

Student housing has changed from the perspective of Animal House (the movie) to today’s’ environment. There have been many product designs over the years and one plan may be a four-bedroom unit with two bathrooms that would accommodate four students. This was a big step up from older campus housing with the bathroom at the end of the hall.  From a lease structure there are four leases with each individual student. Parents of the students would be required to sign on the lease (thus guaranteeing the lease or guaranteeing the bed lease).  This handles the potential eviction of one person or the exit of one student. When contrasting the parental guarantee vs. a typical multifamily rental there may be added comfort level form the investors.  Many of the parents who are guaranteeing the lease for their college student are backed up by six figure incomes and a 700 plus FICO score. If there was a 100-unit complex you may have 300 parental guarantees on the beds.

In many universities the freshmen are required to live on campus in the dorms. First year of college is where most of the fall out or drop out occurs. (One of the big metrics colleges and universities use is the graduation rate of freshmen).  When students spend their freshmen year on campus there is a higher graduation rate). Student housing numbers will rise with increased enrollment but the increase with rentals will lag a year or so as the freshman move out of the dorms. The student housing markets have matured. Naturally, the locations within walking distance to campus is a plus along with the Power Five schools and traditional non commuter schools. Investors like stable, consistent occupancy, tax shelter, appreciation, demand for university in non-commuter schools

So what was the impact from the COVID closings on student housing.  The initial reaction by many was student housing would be in the same position as hospitality with plunging occupancies. There has been an interesting situation occur. The freshmen who were in the dorms were told to leave. While many may have gone home, they were faced with the challenge of what to do with their belonging.  Several self-storage facilities saw an increase in rentals.  Returning to their parents’ home was not an option for many and as a result there was an uptick in additional rentals in private student housing which was not forced to close. In addition, many students did not want to go home. If the students did go home, they wanted to return to college (or at least their off-campus apartment home). Colleges continued to offer on live classes to finish the semester. The private sector student housing management companies who were quick to respond with digital move in, face book page updates as well as increased bandwidth for WIFI did remarkably well. Management companies with operating strategy for digital needs did very well.  If you are a student housing operator and you are behind the times in providing bandwidth, etc. that is a problem.  Many rooms have study areas or rooms with the technology and some with advanced technology for conferencing (Zoom meetings, green screens, etc.) in the rooms.

What is counter intuitive is the school closings (or only online) but parents are on the hook for the rents.

Even with remote access to classes it is hard to replace brick and mortar experience. For some schools who decide not to re-open there may be students transferring to other school who provide the on campus experience. As schools decide on reopening (and a large majority are scrambling to do so) what has happened to the student living situation?  Many colleges have instituted bedroom to bathroom parity.  Meaning each bedroom requires their own bathroom.  This “de-densifying” requirement will push students out of the dorms. Dormitories with four students sharing two bathrooms will be reduced to two students (in a four-bedroom unit) sharing the 2 bathrooms. In the older style dorms this will be even more of a challenge. The freshmen will need to seek off campus housing and add to the demand of private student housing.  The private sector may be at an advantage with the unit mix.  Many one-bedroom/one bathroom units as well as two-bedroom/two bathroom units will not be affected by the parity requirements. In the larger four-bedroom units that only had two bathrooms, the private sector many have a solution.  The third and fourth bedroom may be converted into a high-tech bedroom and bathroom.  Converting into three bedrooms and three baths.  Naturally, specific permitting and local jurisdiction will determine the process.

Campus visits were stopped by April so the lease up may not have been completed. There may also be a scramble for space as schools set to open.  Online walk through of locations and rooms continue as well as online leasing.

There has been a premium placed on a US education by foreign students (and by foreign parents). Restriction on foreign students returning will create loss of revenue for colleges since many of these students pay full tuition.  However, this may permit colleges to accept more US students.  Colleges can pivot easily. It appears that the colleges will have testing upon arrival and the fall term for on campus will end Thanksgiving with online classes for the balance of the term.  Then all students will be tested again when returning for the spring term.

The big question may be what happens if schools open and there is no college football. College football is one of the biggest divers of the economy. Smaller colleges may not be affected as much as the larger schools.

As we move into August, we will monitor all DST assets offered by Sponsors especially in the Multi Family space which makes up 53% of current DST Sponsor offerings.  Student housing offers another 11% of offerings.

Content for this article was obtained through communications with DST sponsors of Student Housing. Not all Student Housing locations are the same and may have different results. 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.