May 15, 2022 DST Education Series B- Asset Classification Discussion

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

Part 3: Student Housing Asset Classification

By Al DiNicola, AIF®
May 15, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

Structurally many of the student housing buildings may resemble multifamily properties. The Student Housing classification at one time was considered part of multifamily but because of the number of offerings student housing now commands its own classification.

Student housing, from an investment point of view, has provided stable returns especially in non-commuter schools. Students 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.

Over the years the stability of “universities & colleges” has been noted as an institution. These pillars of stability provide a path for many seeking higher education, social interaction as well as an avenue to showcase their talents as in the case of the athlete. Two years ago, at the start of COVID there were many questions about the impact on private student housing locations as colleges were closing.

The colleges and universities were first to make a major statement with regards to the COVID pandemic. One swift action taken was the NCAA March Madness tournament to be cancelled. Like all others in the country (and around the world) because of COVID we experienced new behavior in all facets of our lives.

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. Not every college is a prime candidate for a private student housing property. (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 todays’ environment. There have been many product designs over the years and one plan that was popular was 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 for the investors. Many of the parents who are guaranteeing the lease for their college student are backed up by one or more, six figure parental incomes and a 700 plus FICO score. If there was a 100-unit complex you may have 300 parental guarantees on the beds. Multifamily product references unit count Student housing references bed count.

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. The other factor may be the type of colleges such as what is known as the Power Five schools. The physical location would also be important with destination campuses rather than commuter schools. Investors like stable, consistent occupancy, tax shelter, appreciation potential provided by student housing in well selected college locations.

So, what were the impacts 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 was an interesting turn of events. 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 belongings. 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 were 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 offered online 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. If you were a student housing operator and you were behind the times in providing bandwidth, etc. that was a problem. Many student housing communities provided study areas or rooms with the increased technology and including what was advanced technology for conferencing (Zoom meetings, green screens, etc.). Zoom has now become the norm in many daily activities. What became counter intuitive was when the school closed (or only offered classes online) parents were still on the hook for the rents.

Even with remote access to classes it was hard to replace brick and mortar experience. For schools who decide not to re-open some students transferred to other schools that provided the on-campus experience. Most all universities and colleges are back to normal in the post COVID environment. We will explore the anticipated Fall 2022 drivers.

Product design changes. What COVID did drive was the bedroom to bathroom parity requirement. Meaning each bedroom requires its own bathroom. This “de-densifying” requirement pushed 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 unless modifications can be made. 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 had a solution. The fourth bedroom may be converted into a high-tech bedroom and bathroom. Converting the four bedroom two baths into three bedrooms and three baths became the solution. Naturally, specific permitting and local jurisdiction will determine the process.

Campus visits are back to normal and rental lease ups for the 2022 fall semesters are in full swing. The outlook is encouraging.

FALL 2022 ENROLLMENT OUTLOOK: Record Application Numbers Reported Across US

Bolstered by escalating numbers of international students, interest in college attendance is higher than ever. Soaring past pre-pandemic levels. One sponsor believes the four-year, in-person experience is a rite of passage. Something both students and parents both see tremendous value. With more and more US high school students pursuing higher learning and even more international students seeking a US education, many sponsors believe this trend could lead to steady, sustainable incline in college enrollment.

UCLA – Nearly 150,000 applications (Source: UCLA newsroom)
Auburn has reported record 40,000 applicants (Source: oanow.com)
31% increase in international applications (12% domestic) (Source: Common App Data Analytics)
21% increase in underrepresented domestic minorities

DEMAND AND SUPPLY OF STUDENT HOUSING: What has changed? First of all, enrollment in degree-granting institutions in the US is projected to hit 19.8 million by 2025, representing a 2.6 million increase from 2017.

New student housing deliveries for 2021 reached the lowest total since 2009
Pre-COVID vacancy rates of US student housing remained considerably low between 2016 and 2019: 2016 (1.7%), 2017 (2.5%), 2018 (2.6%), and 2019 (2.3%)

Sources: Axiometrics and https://www.guide2research.com/research/student-housing-statistics (July 07,2020)

Technology & Security– What has also changed in security both inside and outside the properties. For example, some offerings boast the latest technology to restrict access to only residents. The Blue Tooth applications where students have access through their phones eliminate the need for keys and other entry systems. Cameras are being positioned in nearly every location to monitor assess to buildings, hallways, and common areas. Security has become a major required amenity or a demand of parents and students.

Final thoughts on American Education. There has been a premium placed on a US education by foreign students (and by foreign parents). Restrictions that were placed on foreign students during COVID have been lifted. During COVID there was a loss of revenue for colleges since many of these students pay full tuition. However, when the foreign students could not return during COVID this did permit colleges to accept more US students. Colleges have demonstrated they can pivot easily. The private sector student housing developers and sponsors are increasing the attraction of the property with enhanced designs and amenities. Many of the offerings (structurally and amenities) rival the Class A Multifamily properties and if you did not know the property was student housing you would never know the difference.

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.

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.

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.

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.