What are the Basics for Calculating Your Basis

When an investor sells an investment property there is the ability to defer paying capital gains taxes (taxed at 0%, 15%, or 20%) as well as the recapture of depreciation (taxed at 25%) for payment at another time. The IRC §1031 enables you to exchange the property you are selling for another property.

By Al DiNicola, AIF®, CEPA™
April 20, 2023
Adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD

This may be referred to as a like kind exchange. For the purposes of this writing, we will address investment property and not primary residential property. We are not providing tax advice and investors are encouraged to consult their own CPA.

Understanding  basis in a 1031 exchange.

 There are several types of basis, including:

  • Original Cost basis;
  • Adjusted Cost Basis;
  • Depreciated Basis;
  • Tax Basis;
  • Carried Forward Basis; and
  • Step up in Basis.

The confusion may begin with an investor wondering what happens to their basis when the property is sold. When the topic of depreciation arises there are a variety of questions. What happens to depreciation while I own the property? How long does it take to use up all the depreciation? How can I start depreciation over again with a new property? If I use up all the depreciation and I still want tax advantaged real estate, what do I do? Does the entire property get depreciated?  All of these questions and more may be traced back to the original property to establish your basis. There may be a long paper trail needed if you do multiple exchanges.

Hypothetical example

Jack & Diane are selling a rental house in New Jersey. They paid $175,000 for the property in January 2002. They also paid 15,000 in closing costs.  They invested another  $25,000 to add a garage. They accept an offer for $400,000 on the property (December closing 2022). They have owned the property for ten years. They have located a property in Daytona Beach for $400,000.

Original Cost Basis

The original cost basis is the original purchase price, associated closing cost at the time of acquisition of the relinquished property. The original cost basis in the home would be $190,000 ($175,000 original purchase price, $15,000 in closing cost).

Adjusted Basis

The adjusted basis would be the original cost basis plus the $25,000 for the garage. If there were any other major renovation or cost that adds to the value of the home those cost or investment would be added.   For this example, the total adjusted cost basis would be $215,000. 

Depreciated Basis

Depreciation is an interesting situation. The IRS assumes you have taken the depreciation whether you utilized that depreciation or not. The property was depreciated each year. The depreciation schedule is 27.5 years for residential property (commercial property is 39 years). However, the entire purchase price of $175,000 is not depreciated. Only the structure can be depreciated and not the land. For this example, we will assign a land value of $25,000 to the property and $150,000 for the structure plus the closing cost of $15,000 and addition of the garage $25,000 for a total of $190,000. The depreciation taken was $6,900 each year for a total of $138,000. In this case  the property has a depreciated basis  of $77,000.  In some cases, the depreciated  basis may be zero if the property was held for the entire depreciation period. 

Original Purchase$175,000
Closing Cost$15,000
Original Cost Basis$190,000
Garage Addition$25,000
Adjusted Cost Basis$215,000
  
Depreciation taken (rounded)$138,000
Depreciated Basis  (rounded)$77,000

Tax Basis

One of the first  items an investor may want to know is  the tax basis in order to determine if the investor wishes to enter into a 1031 tax deferred exchange. The tax basis would be used to establish the capital gains on the property as well as the recapture of the depreciation over the years. The New Jersey home has an adjusted cost basis of $215,000 and sold for $400,000. The cost of selling the New Jersey home was $20,000 and that is subtracted from the selling price to arrive at the net selling price used to determine the capital gains. This would be $380,000. The net selling price on the property would be $380,000 minus the $77,000 depreciated basis taken for a Tax Basis of $303,000. For federal tax purposes this amount is divided into recapture and capital gains. There will be recapture of the $138,000 depreciation taken is taxed at a rate of 25%. The remaining $165,000 would be taxed at the capital gains rate. This would depend on the individual tax payer (0%, 15%, 20%). Individual states such as New Jersey have taxes that are also due upon the sale and would use the entire $303,000 for calculations. There may also be (depending on tax payer income level) a 3.8% NIC tax on gain. These taxes would be deferred if utilizing a 1031 tax deferred exchange.

Carry Forward Basis

The  $77,000 depreciated basis is the  carried forward basis.  The property in Daytona Beach is the same price as the New Jersey home being sold. This is a very important fact because the price of the new property is a big factor that affects many items. Actually, they are buying equal. Because they bought equal the basis in the new property is the same as the remaining basis in the New Jersey home. The basis rolls forward to the new Daytona Beach property.

The original date (2002) of the New Jersey home is what appears on the future depreciation schedules.  The depreciation schedule carries over as if they were still depreciating the New Jersey home. In this case there is no additional depreciation time other than what is remaining on the $77,000. That would be seven- and one-half years remaining.  

 If you had a mortgage on the relinquished property this will be noted.

The depreciated  basis on an investment property can appear to be allusive to determine. One of the most important factors is the purchase price of the replacement property. This dictates many items that will affect you.

How to increase basis in replacement property.

The question many investors ask is how do you change the dynamics on the exchange and potentially increase tax favored write offs?  One strategy would be to purchase up, meaning  a more expensive replacement property. Rather than buying a $400,000 property in Daytona Beach hypothetically they purchase a $500,000 property. Their basis in the property would be increased by $100,000.  This is a combination of the rollover $77,000 plus the $100,000 for a total of $177,000. There would be 7½ years remaining on the $77,000 and the $100,000 would start on a 27 ½ year depreciation schedule. The updated depreciation schedule shows the continued depreciation of the New Jersey homes (as if they still owned it) and the acquisition of the Daytona Beach property portion as of the date they closed on the Daytona Beach property.

Bring more cash or acquire more debt!

In order to increase the purchase price, the investor would need to bring additional cash or arrange for a mortgage or loan for the $100,000. This may involve applying for a loan.  In most cases the investor would need to sign for and be liable for the loan.  To avoid personal liability for a loan, some investors utilize Delaware Statutory Trust (DST) as a replacement property especially when leverage is present.  DST have non-recourse debt. This eliminates the need for Jack & Diane to apply for or be liable for any of the assigned debt on the new acquisition. We have guided investors who have fully depreciated their investment properties who acquired a DST with 50% Loan to Value. This would increase the basis by an additional the amount of the debt assignment ($400,000 for example). Acquiring additional debt is not for all investors.  If the investor utilized a future 1031 exchange the acquired debt (or balance paid off) needs to be replaced. The other consideration would be the overall goals of the investor when acquiring a property and in this example the Daytona Beach property may have other uses in the future.

Step Up in Basis

The final basis would be referenced as the step-up basis.  This strategy benefits the heirs of the investor.  When the investor passes away there is an adjustment from the original basis to the current market value. If the original property was purchased for $175,000 fully depreciated (over 27.5 years) and now worth $750,000 that is the new basis. The basis has been stepped up to current value.  If the property is sold there would be no capital gains taxes due and there would be no recapture of depreciation taken.  This strategy may be utilized to build generational wealth.

As previously stated, we are not CPA. We have guided many investors with a list of questions for their CPAs and assisted in countless 1031 exchange consultations.  We have also assisted in the acquisition of DST utilizing the 1031 process.  Call with any questions you may have. 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. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place. Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Why not a TIC? Are DSTs better?

A frequently asked question is why a Delaware Statutory Trust (DST) potentially better than a Tenants in Common (TIC). This question comes up especially when considering a IRC § 1031 tax deferred exchange.

By Al DiNicola, AIF®, CEPA™
March 30, 2023
Adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD

Is deferring taxes similar to kicking the can down the road? Many investors will review the sale of their real estate and wonder how taxes may be deferred.  The 1031 tax deferred exchange often is the immediate solution. Many investors who are selling their actively managed real estate are searching for hands free or passive investment so they can avoid any active management.   Over the years we have heard from investors, qualified intermediaries (QIs) as well as CPAs that the best intentions of the investor to execute a 1031 exchange were not always successful.    What solutions are there to defer taxes? One recent solution (which does not need a 1031 exchange) is an investment in an Opportunity Zone.  We will elaborate on OZ & OZ Funds in future articles.  The two other choices involving a 1031 exchange are Tenants in common (TICs) and Delaware Statutory Trust (DSTs).  The success of the DST has nearly replaced the TIC to a large extent.

Opportunity Zone -Short Version

An opportunity zone enables an investor to retain the basis in the property and only invest the capital gains into a qualified Opportunity Zone offering.  The offering may be a single site or a fund with multiple properties.  Taxes are deferred until the end of 2026 (payable April 2027). If the investor retains their interest in the OZ for a period of 10+ years, then any profits from the sale of the asset are tax free to the investor.  You are free to use the basis however you want to use the proceeds.  However, capital gains taxes as well as the  25% tax on the recapture of depreciation  will be due April 2027. We are well versed in the structure, review, comparison to a 1031 exchange, and recommendation of OZs. Contact us for an in-depth conversation if this may be one of your options.

What is a TIC (short version)

This is a type of co-ownership with multiple investors where funds are pooled to invest in a property. Each property owner typically receives a separate deed and title insurance for their percentage of interest in the property. There may be up to 35 individual investors in a TIC.  Depending on how much each investor has contributed there will be an undivided interest but not equal interest and benefit in the property.  Each investor will be responsible for their percentage share of income, appreciation (loss) and any tax shelter (depreciation) from the property.  There is also financial liability for investors.

What is a DST (short version)?

The  Delaware Statutory Trust (DST) has become very popular over the past 19 years.  This structure enables many more investors than a TIC (potentially unlimited but up to 499 investors). Each investor would purchase a beneficiary ownership interest in the property (referenced as the asset)  of a trust.  Limited partnership occasionally gets compared to a DST with regards to the structure. However, there are many differences aside from the ability to utilize a 1031 exchange with a DST. DST Overview – DST Education and Market News (dstnews.org)

TIC and DST Differences & Similarities

There will be a separate deed for each investor under a TIC structure (noting their percentage of ownership based on the financial contribution). In a TIC structure there is also voting right associated for each investor.  TIC owners also may transfer their ownership interest to another party without the consent of the other TIC investors.  In a DST an investor will need to wait for the sponsor to sell the property.

There are several similarities between the TIC structure and the DST structure. For investors when selling, both may qualify for a 1031 as a replacement property. DST have professional management and many TICs will also utilize a professional manager.

If an investor is seeking diversification as a strategy, then both structures may provide an alternative. DSTs have a low barrier to entry with many only requiring $100,000. TIC may also have lower entry levels depending on the overall investment.

Determining which structure is better- decision or conflict.

One of the structural elements some investors find attractive in the TIC structure is the ability to make decisions. That is if there is a unanimous decision among all the investors. There could be as many as 35 investors in a TIC and obtaining a unanimous decision may be problematic.  This may result in conflict. Imagine if there are 20 members of a TIC and eighteen want to sell and there are two who do not.  This would enable the minority to dictate the process. Many TICs were caught in the greet recession (2008-2009) with the inability to take swift action and resulted in many TICs failing.   

Recently the Delaware Statutory Trust investment strategy has been preferred by investors over Tenants in Common. In the DST structure the sponsor has the lead on all aspects of the DST.  This includes when to sell the property. Investors who want to be able to make decisions are not the right fit.  The entire decision process is in the hands of the sponsor. Investors who are seeking passive ownership evaluate this as a benefit.

What is the ante or buy in?

If you are in Vegas visitor (gambler) will search out which tables to sit down based on the posted minimum bet necessary to play. The DST minimum typically is $100,000 for a 1031 exchange investor ($50,000 in some cases for a cash investor). In addition, there are many more potential investors when compared to the 35-investor limit in a TIC.   For example, if there was a $35 M property each TIC investor would need to invest $1M to pay cash for the property.  The same $35 M property could have 350 DST investors each investing $100,000.  This enables investors to diversify their investments in many more additional DST assets.

If the same $35M property was to be leveraged with 50% LTV each TIC investor would need to come up with $500,000 cash portion and be personally responsible for a $500,000 loan. In addition, if any other TIC investor default on their portion of the loan the other TIC investors are responsible for making the payments. In a DST structure each investor would come up with $50,000 and have a non-recourse debt assignment for $50,000. There is only one entity responsible for the debt and that is the DST Trust.

The flexibility in the DST structure with the non-recourse loan and lower capital investment enables smaller accredited investors to invest in a larger institutional property.  When an investor borrows to fund the TIC real estate investment that debt will most likely appear on their credit profile and should be included on a personal balance sheet as a liability. Some TIC investors may utilize their other investment and create a cross collateralization of assets.  This does not happen with the DST investment vehicle, where the debt is all non-recourse debt.

Beat the Clock- Meeting the 1031 requirements.

The two critical time periods of the 1031 exchange are the 45-day identification period and then the 180-day closing time period. The process for the TIC investment structure may be obtaining consensus on the properties to identify especially within the 45-day period.  The other potential issue with the TIC (if structuring a new TIC) is the requirement for each investor to provide funding if any of their funds are being borrowed. Each borrower would need to apply for their own loan and go through the underwriting process.

When an investor starts the acquisition process for a DST the time from start to finish may be 7-10 days. This may include 2-3 days for the initial paperwork (once the asset is identified) interaction with the QI and then 2- 3 days include a weekend and then closing can occur. Contrast this quick period with the challenges in structure and function of the TIC, especially with the 45-day identification timeline places the TIC as not the preferred option.  The other toxic situation that may implode the TIC exchange may be if one of the members does not obtain financing for their respective portion of the acquisition.  That could jeopardize the entire exchange for all parties.  Compare that situation with the non-recourse structure of the DST acquisition where the DST comes with prepackaged financing.

The limiting or qualifying factor for a DST is the status of the investor  DSTs require that all investors are accredited.  A TIC does not have the accredited investor status.

Here is a graphic view of the two structures.

DSTTIC
Number of InvestorsUnlimited, though typically capped at 499Up to 35
Investor OwnershipPercentage of beneficial ownership in a Trust that owns the propertyUndivided interest in the property
Number of Borrowers1 (the DST)Up to 35 (each investor is a borrower
Reporting on Credit Profile Report and Balance SheetNOYES
Major DecisionsNo investor voting rightsEqual voting rights and unanimous consent
Bankruptcy RemoteProvided by DST structureInvestors must form Single Member LLC
Investor GuaranteesNot neededInvestors generally require to provide “carve-outs”
IRS GuidanceRevenue Ruling 2004-86Revenue Procedure 2002-22

If you’d like to learn more about DSTs and 1031 Exchanges schedule your free 30-minute call today.

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. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

Tax Time- Reporting 1031 Exchanges

Congratulations! You have successfully followed all the rules and completed your exchange on time.  You utilized the services of a Qualified Intermediary (QI) so you are in full compliance with IRC §1031.

February 19, 2023
By Al DiNicola, AIF®, CEPA ™
adinicola@namcoa.com
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

You purchased a property equal to or in excess of the property you sold. You used all the cash proceeds and replaced the debt that was paid off on the property you sold. Now it is time to report the details of the exchange as required by the IRS. SO, exactly what does the IRS want to know about the exchange. Maybe not everything but there are key elements of your exchange you need to submit.

CPAs for Complete Answers

We are not CPAs and would suggest consulting your CPA for full compliance.  This may serve as an overview on what to expect.

The Internal Revenue Service provides several forms that need to be completed reflecting your exchange details. Everything starts with form 8824. Real estate investors who have utilized the 1031 exchange are required to fill out this form. This reflects the transactions from the previous tax reporting period. There is a complication that occurs when the sale of the relinquished property and the acquisition of the replacement property does not occur during the same tax reporting year. For example, if you sold your property in August 2022 and completed your exchange in December 2022 the process is straight forward.  However, if you sold your property in August 2022 (identified your replacement properties with the prescribed 45 days) and are waiting to close in February 2023 there is an extra step required.  You would need to fill out form 8824 and attached to your 2022 tax returns. You would complete the reporting when filing your 2023 returns.

Fill in the Blanks- Correctly

  • To avoid any unnecessary penalties or liabilities for taxes the forms need to be filled out correctly. The IRS typically may want answers to Who, What, Where, When, how much, and more questions that will be on Form 8824!
  • What was the property exchanged or a description?
  • Did you make any money (gain) or lose money (loss) on sale of other property you sold or gave up that was not part of the exchange?
  • What was the dates of the replacement properties identified and when the property was closed, or title transferred?
  • What were the proceeds from the sale, was there a mortgage paid off, or any other Cash received or any other relief of liabilities?
  • Were there any related parties to the transaction.
  • What was the adjusted basis on the property that was relinquished. And what was the gain. 
  • What was the fair market value of the property that was acquired.

There are four section to Form 8824.

  • Part I Information on the Like-Kind Exchange
  • Part II- Related Party Exchange Information
  • Part III- Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
  • Part IV- Deferral of Gain from Section 1043 Conflict of Interest Sales

Part I (lines 1-7)  as stated includes information on the exchange. This would include description of the relinquished property which is a full address or other acceptable description (occasionally referenced as the down-leg), the date you transferred title to buyer, when you identified your potential replacement properties (45-day replacement notification) to your Qualified Intermediary (QI), and finally the date you closed on one or more of the identified properties on your list (occasionally referenced as the up-leg).

Part II (lines 8-11) addresses any related party exchange information.  If you had an interest in or stake in a property with a related party translated as any family member, spouse, grandparents, sister, brother, a partnership, etc. would need to be reported.    There a few noted exception including death of related party. As always consult your tax advisor.

Part III (lines 12-25) focuses on the financial numbers related to the exchange. This is how the IRS tracks the financial details of your exchange. Topics and questions include references to fair market value, adjusted basis of relinquished property, gain on property, cash received, adjusted basis of like kind property, realized gain and other financial related questions.

Part IV (lines 26-38). This would be a special situation and used only by officers or employees of the executive branch of the federal government or judicial officers of the federal government (including certain spouses, minor or dependent children, and trustees as described in section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of the divested property.

Understanding and Execution

Many CPAs and especially tax advisors understand the process especially those who handle 1031 exchanges on an ongoing basis.  The execution of filling out Form 8824 should be very easy for those professionals.  CPAs who are engaging with an investor for the first time may need to ask a lot of question of the investors. A big part of the solution will come back to the individual investor understanding the relinquished property details when acquired (typically found on the closing documents) as well as all cost involved during the ownerships that may add to the basis in the property.

Standing by to assist

We deal with 1031 exchanges all the time and are happy to engage with CPAs on the initial question for your exchange.  We have engage with CPA on clarifying the acquisitions of Delaware Statutory Trusts (DSTs).  DSTs have been utilized by investors for about 20 years.  However, many CPAs do not see as many exchanges involving DSTs as compared with traditional real estate. There are a few more details when a DST is acquired or relinquished.  Typically, those details may be in the description and percentage of ownership. 

Future Discussion.

There are occasions when investors engage in a partial exchange.  This is either by design or by one or more of the properties identified falling out or a failed exchange.  We will address partial exchanges in an upcoming post.

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. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

SOCIAL MEDIA

Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

Be aware of potential impact of “Boot” in a 1031 Exchange

When faced with selling an investment property besides the amount of proceeds to pick up at closing the investor may consider the taxes that may be due. Investors may utilize a tax deferred 1031 exchange for all or part of the transaction.

By Al DiNicola, AIF®, CEPA ™
adinicola@namcoa.com
February 17, 2023
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

Tax deferred 1031 Exchanges and Boot

When faced with selling an investment property besides the amount of proceeds to pick up at closing the investor may consider the taxes that may be due.  Investors may utilize a tax deferred 1031 exchange for all or part of the transaction.  If you take proceeds off the table, the proceeds are referenced as boot. In addition, if you are doing an exchange and do not replace the loan that was paid off (either with another loan or fresh cash) you will be liable for mortgage boot. Understanding your overall tax liability should be a starting point.

The Internal Revenue Code does not formally use the term “Boot”. It is used in discussing the tax implications of a 1031 Exchange. In searching for a potential meaning here is a reference.  Boot is an old English term meaning “Something given in addition to.” “Boot received” is the money or fair market value of “Other Property” received by the taxpayer in an exchange.

Many consultants and investors agree that when done properly a 1031 exchange can provide a host of benefits to the investor today and in building an investment portfolio.  The major benefits would be the deferral of capital gains as well as the deferral of recapture of depreciation.

There are situations where an investor believes they are executing a 1031 exchange but may fall short for a few reasons and end up owing money to the IRS.

When do you create Boot.

 Cash boot.

You acquired your relinquished property for $400,000 and sell your relinquished property  for $1,000,000. (For this example we will not attempt to account for any commission or cost of sale). If the replacement property is $800,000 and you collect a check for $200,000 that would be considered boot and taxes would be due. This is income and would be taxed at the taxpayer capital gain rates. It is extremely advisable to contact your CPA.  It may become more involved in determining your exact tax responsibility based on other factors such as recapture of depreciation taken under what maybe referenced as a partial exchange. 

There is also another situation where mortgage boot may be present.

You acquired your relinquished property for $400,000 and sell your relinquished property  for $1,000,000. There is a balance of $200,000 on the relinquished property. (For this example we will not attempt to account for any commission or cost of sale). Once the mortgage is satisfied you have $800,000 in cash. If the replacement property is $800,000 and you pay cash for the property without a loan the $200,000 loan that was paid off would be subjected to what is known as mortgage boot (debt reduction) and taxes would be due. Again, it is extremely advisable to contact your CPA. There is another consideration on this example which we will cover later in this article under Delaware Statutory Trust reference.

Rule Compliance.

IRS rules for 1031 tax deferred exchange compliance are straightforward. Boot would be created in several scenarios. There are basically three main IRS rules or stipulation on being eligible or complying with the 1031 rules. That compliance would enable the exchanger to fully defer capital gains taxes.

The basic rules are:

  • The replacement property needs to meet or exceed the market value of the relinquished property.
  • The investor must use all the proceeds from the relinquished property to purchase the replacement property.
  • If there is a debt satisfied (mortgage) upon closing, then the same amount of debt must be replaced, or the investor can substitute additional cash into the exchange.

Utilizing the rules  from above.

  1. Meet or exceed market value. IF you are selling a property for $1,000,000 you must purchase a property for $1,000,000. There would be an offset for closing cost, commission and a few other items that would reduce the replacement price of the property.
  2. Use all the proceeds. If you receive $1,000,000 in proceeds all the proceeds need to be used.
  3. Replace debt. IF you are selling for $1,000,000 and have a loan paid off of $200,000 you need to have $200,000 in debt on the replacement property and use the additional $800,000 in proceeds towards the replacement purchase.

Exchange Guidance

Exchange guidance may be available from the Qualified Intermediary (QI).  Many Qis assist investors with the required forms and adherence to the dates mandated for identification of the replacement properties.  In addition the QI may also be able to provide some guidance on balancing the exchange if they understand the terms of the purchase.  Technically this may fall outside their scope of services.  When an investors submits the replacement list to the QI the entire market value for the replacement property is stated with out the breakout of cash (equity) invested and the debt component making up the full value. CPAs and Financial advisors who deal with 1031 exchanges on a regular basis may be better suited for balancing the exchange.

There will be Boot can I still exchange?

If you did not satisfy all the requirements for the IRS for a full deferral you can still enter into and execute an exchange. The 1031 tax deferred exchange is not an all or none strategy.  Partial exchanges are possible.

Delaware Statutory Trust (DST) may assist with mortgage boot issues.

There are times in an investors life when they simply don’t want to apply for, sign for, or be financially responsible for another loan on the replacement property.  Recently we assisted an investor with and interesting challenge. The exchange was rather large and started with the sale of an apartment property.  The sale was for $6.1 million but conceptually can be utilized in a lot of situations. Upon the closing of the relinquished property the investor retained $300,000 to pay for personal items.  This would be recognized as boot and taxes due.  Taking boot occasionally serves a purpose especially when there are other financial needs.  There was a loan paid off on the property of over $2M. The investor wanted an additional cash extracted from the exchange in the amount of $400,000.  This created an issue with balancing the remaining cash and satisfying the replacement of debt. The solution was to create a diversified portfolio of DSTs with Non-recourse debt to the investor that balanced the total exchange. The investor was seeking a solution that would avoid signing for any debt responsibility. DST are all structured with non-recourse debt.  The balancing exercise blended DSTs with a variety of loan to value property enabling the investors to avoid any potential taxes on mortgage boot. There would be taxes on the cash taken out of the transaction.  In addition, we also balance the overall replacement market price of the relinquished property. One helpful addition to the solution was the investor’s CPA who we engaged with early on to fully understand the investor situation.

Final word

We welcome calls from investors and CPAs on the 1031 exchange process as well as how DSTs may simply the exchange process. If you are in the midst of selling your property and looking for a few suggestions, please contact us.

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. 8215 SW Tualatin -Sherwood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

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Social Media platforms are solely for informational purposes. Advisory services are only offered to clients or prospective clients where the advisory firm and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by NAMCOA unless a client service agreement is in place.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

June 30, 2022, DST.EDU Series B- Part 10 Retail Asset Class

June 30, 2022- DST.EDU (Series B- Part 10) Retail Asset Class
Editor’s note- this is part ten of a ten-part series on DST asset types.
Part 10: Necessary Retail Asset Classification Discussion

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

Why Investing in Retail Makes Sense
Delaware Statutory Trusts (DSTs) continue to gain in popularity among cash investors and 1031 tax deferred exchange investors. Investors seeking diversification may refocused on a specific style of retail investment.
Driving around most cities and towns we see many businesses that provide valuable services to the public. Retail has been a major driver of the economy over decades. There is a wide variety of retail space that exist from small strip centers, neighborhood centers, regional centers, power centers and major lifestyle centers. In some areas of the country, we are surrounded by retail. In rural areas you may need to drive miles to purchase groceries and other necessary items for daily life. With the potential of lifestyle centers all retails have one goal in mind and that is to sell services or goods. Over the past 5 years there has been an acceleration of the e-commerce sector (driven by technology) creating competition to the brick & mortar outlets. Many of the brick & mortar stores have opened on-line outlets. There are active sponsor of DSTs structuring offerings with the potential for higher-than-average risk adjusted return especially with rising borrowing rates. However, the investor needs to understand the dynamics of the various retail sector.

Understanding the Retail Asset Class
As with all asset class investors need to understand what can create a successful investment. With retail there may be more variables that may be out of the control of the development company or in the case of a DST the sponsor. The success of a retail investment can be directly linked to the property. The US economy has a direct correlation to the success of many retail properties. Indicators including job creation and increased earning across all employment sectors do add to consumer confidence. The tenant who would be renting the property actually create the value of their business enabling the business to make a profit and afford to make lease payments to the underlying investors. Retail that can build a brand that consumers have confidence in the quality of service or effectiveness of the products prompting the consumer to buy will add to the tenant success. That would equate to tenant renewals for the landlord or investor.
Retail includes an overwhelming list of types of buildings, locations, and designs. We will provide a brief overview prior to a deeper dive into the DST style offering.

Lease Types, Anchors and Duration
We frequently hear the term Triple-Net Leases or if in type NNN. Landlord (investors) may prefer the NNN structure. The main reason is the tenant is responsible for all taxes, maintenance an dinsurance on the property. There may be variations to this structure. The landlord shifts the financial risk to the tenant. One concern for the investor may be how well the tenant maintains the building and potential problems failing to maintain properly.

In prior years stores such as Sears and others no longer in business were considered “Anchor” Properties. Today the anchor tenants many have changed but these anchors continue to drive traffic that smaller retail tenants may benefit from exposure. More traffic may result in increase in potential rents that tenants are able to pay.

Long term leases may benefit both the landlord as well as the tenants. Leases may be as short as a few years up to 20 years. Having a longer lease may assist the tenants to building their name recognition, brand and longevity in a neighborhood or location.

Is E-Commerce a Threat
When we hear E-Commerce, we may have visions of everyone ordering on line for many goods and services. Investor may be nervous of the word e commerce and the potential effect on the retail property success. True there are tenants moving from a traditional storefront and seeking a position online with brand identity seeking to create or in some cases recreate a business. E commerce and internet sales will continue and can be a threat to certain retail. The other dynamic is the increased physical stores for some online seller. For example, Amazon will continue to increase their physical presence. There are also strategic relationships with online sellers offering customers to ability to return unwanted merchandise at a physical location.
The relationship between the E-commerce sector will continue to evolve with the physical retail stores and may not be hurting the retail sector just creating a new relationship. There are consumers who want to be in a retail environment.

Is Any Retail Insulated?
There is another type of retail section that is worth mentioning. We may reference this as “the Insulated Retail Tenant”. The profiles of the retail tenant, (that may be included in a Retail DST), would address those that e-commerce sector that are impossible to replace. Services like a dry cleaner, specialty restaurant, such a juice vendor, ice cream, a clinic, nail salon, and other that involve labor to provide the service to the customer. Overall seeking diversified and desirable Retail tenants that can fill the parking lot with repeat customers, whether its weekly, monthly, or quarterly.

DST Retail Alternative
The DST retail offering seek a somewhat different approach to a typical retail offering. Over the past few years (and especially during the COVID environment) the offerings have focused on necessary retail. Recent portfolio offerings have included Walmart neighborhood stores, Kroger supermarket, Publix Grocery stores, NAPA Auto Parts, CVS, Walgreens, Dollar general, Fresenius Dialysis center, tractor supply and other similar types of stores. These physical locations would also have long term leases. This portfolio would not include a small unbranded retail store in a strip center. The other dynamic of a diversified portfolio of product type would be a geographic diversification. Many of the portfolios would include assets located in a variety of markets or states. A portfolio may have 18 different properties located in 9 states. There have also been single asset retail offerings. For example, there have been BJ Wholesale stores or Cabela’s Bass Pro shops that have appeared in DST offerings over the years.

Conclusion
The importance of spending by consumers cannot be questioned as a critical part of the economy. Many of the same investment criteria for investors in a non-DST investment is used for DST offerings. However, there may be an expanded vision of retail with a DST offering. The main difference may be the ability in a DST to obtain diversification both with markets and number of assets that may assist to mitigate risk for the investor. An investor with $1 MM to invest in a traditional real estate may have one location and with leverage may be forced to sign for a recourse loan on the asset. With a diversified DST portfolio, the same $1 MM may provide the investor with many more assets in their portfolio, non-recourse debt (if leveraged) and potentially geographical diversification. In addition, the passive nature of the DST with no management responsibilities may relieve investors of other concerns.

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. 1719 NW Edgar Street, McMinnville, OR 97128 MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC

 

 

June 23, 2022- DST Education Series B- Part 9 Medical Office

Editor’s note- this is part nine of a ten-part series on the various asset types of DST offerings.
Part 9: Medical Office Building Asset Classification Discussion

By Al DiNicola, AIF®
June 23, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, member of FINRA/SIPC

Why Investing in Medical Office Buildings Makes Sense
Delaware Statutory Trusts (DSTs) continue to gain in popularity among cash investors and 1031 tax deferred exchange investors. Investors seeking diversification may include Medical Office Buildings (MOB) in their portfolio. The need for medical services continues throughout the United States. Large and medium hospitals service the needs of a vast amount of the population. For the purposes of this article, we will focus on the smaller medical facilities that handle outpatient services that do not require an overnight stay. There are a variety of outpatient services that include kidney centers, surgery centers, orthopedic offices and many more. There has been growth in many areas of the country and not just in southern states where many retirees tend to relocate. The performance of this asset class has been consistent. The MOBs may be single site offering or there may be a portfolio of locations in an offering. Specific performance of the MOBs asset class may be hard to zero in on because many MOB have been included in the overall office asset class. Some typical office asset class offerings may have concerns for occupancy with the ability for employees to work from home. However, the MOB require full staffing to handle the growing needs of patient services. The MOB provide medical professionals facilities to handle the variety of needs of patients including surgery centers. When the facilities are professionally managed physicians and medical specialist can focus on the needs of the patient. Investing in DST as well as MOB are not for everyone. However, there are reasons to consider investing in the asset class. Based on the variety of medical services, procedures and requirements of the population of the US, the medical office asset class may be worth considering.

Strong Historical Performance
There has been a steady growth of the medical real estate space when compared with the general office space. In addition, long-term occupancy rates in MOB have steadily increased when compared to other office space. According to the CBRE 2021 Healthcare Real Estate Investor & Developer Survey Results, 90% of CRE firms stated that between 2020 and 2021 the occupancy of their medical office portfolios either remained stable or increased from the year prior.
When you visit a medical office building you may be aware of the amount of equipment that has been installed and other specialty build out components. The features of certain buildout include not only the waiting room and offices but all high-tech testing devises, monitors, plumbing needs, operating rooms, recovery rooms, special wiring for electronics, specialty gases and many more features. With all these tenant improvements it is easy to understand tenants staying longer than traditional office renters who may be running a business such as a law firm. There would be a tremendous cost involved with moving equipment and switching to a new location. For this and other reasons there is a stable occupancy rate for MOBs and have demonstrated consistent rent growth over the past years. This stability has also enabled landlords to increase the dollar per square foot rents.

DST sponsors recognize Investor Demand
DST sponsors recognize the strength of the MOBs historical performance over the past few years. Especially in the sun belts (southwest and southeast US) where there is an expansion of the medical office asset class. For this reason, sponsors are seeking opportunities to offer cash investors as well as 1031 exchange investors quality offerings. However, the task to bring on offerings is more difficult than you would imagine. There is competition for the assets for institutional investors and private investors. There are more REIT offerings than DST offerings.
Even during the Great Recession, the medical office building sector demonstrated resistance to the market slowdown. This may have provided an indication of how the asset class would perform in future turndowns as well as the COVID pandemic. The resilience to a downturn and the performance of the MOB drove the increase in investor interest.

Outpatient Locations
Many Americans have experienced taking someone to an outpatient center or going yourself. The innovations in technology and efficiencies in surgery centers provide exceptional care and results for patients. There are also several other specialty services such as kidney dialysis centers, orthopedic centers and a variety of other facilities. Numbers of outpatient centers continue to increase and do not show any signs of slowing down. The rationale for the increase may be connected to the patient looking for more access to healthcare (potentially being more affordable) and convenient locations. The traditional “in hospital” locations tend to be more expensive and by patients utilizing outpatient centers it may reduce the patients out of pocket expenses.

MOBs Asset Class may be recession resistant
COVID 19 accelerated the virtual or telehealth alternative to the traditional office visit. However, as well executed this new technology performed this type of online medicine is not an acceptable substitution for traditional medical services. The use of telehealth also prompts other questions such as what is the long-term efficiencies, quality and safety not to mention all the in person needs such as lab work, x-rays, and physical exams. As with any new technology the medical professionals need to monitor the effectiveness for the safety and health of the patients. Not to be overlooked would be the COVID-related elective surgery centers being closed.

Tenant Credibility & Responsibility
In a DSTs there will be a master lease that reflects underlying credibility and credit worthiness of the tenant occupying the space. The tenant may occupy a single site location or may have multiple locations in a portfolio. In many MOBs, including DST offering, the tenant typically enters into a triple net lease (NNN). This limits the investor exposure to escalation of expenses. The secure distributions may not have as much upside elasticity but will offer consistent returns. The Private Placement Memorandum (PPM) that all DST investors need to receive prior to investing will layout many aspects of the offering including the potential risks associated with the investment. Also, the background of the tenant leasing the space, terms of the lease, rental increases and other analysis would be illustrated.
Potential Distributions & Exit Strategies
The PPM would also illustrate the projected annual distribution (typically paid monthly) and the exit strategy for the potential sale of the asset. The exit strategy as with other DST offerings include receiving potential proceeds from the sale (at which time the investor would be responsible for their capital gains taxes to be paid), execute another 1031 into DST offerings, or execute another 1031 into a traditional brick and mortar real estate. Recently some sponsors have introduced an alternative in a 721 UPREIT. Details on the IRS 721 will be featured in future articles.

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

May 25, 2022 DST.EDU Series B Part 5 Senior Housing Asset Class

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

 

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

May 10, 2022 DST.EDU Series B Part 2 Multifamily Asset Class

Part 2: Multi Family Asset Classification

By Al DiNicola, AIF®
Editor’s note- this is part two of a ten-part series on the various asset types of DST offerings.
May 10, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

When multifamily asset class becomes a topic of discussion there is a lack of formal definition of the variations of multifamily assets.

Multifamily loosely defined would include apartment complexes. These are multi story buildings from two stories to multi story buildings as well as repurposed buildings.  These may be in suburban locations, an urban location, or the edge of urban locations. The construction of the buildings may be purpose built or a conversion of an older building. The conversion of older buildings to multi-tenant dwellings are appearing in cities as property owners may be repurposing the asset.

For example, in cities like Philadelphia a warehouse along the waterfront may be converted into residential flats. In certain cities there may be special tax abatement or incentives to redevelop. Recently we placed an investor in a multifamily property that had a twenty-year tax incentive.  Not all locations can be guaranteed this special situation.

The properties may also be separated into a classification or grading system from Class A (highest), Class B, C & D.  The grading may be subjective in nature depending on who is making the evaluation.  Sponsors of Delaware Statutory Trust (DST) will conduct due diligence into the various properties. It becomes very important to understand the underlying principles that create the risk / return profiles of the opportunities prior to acquisition. There may also be a fine line between the asset classification.  Sponsors, Investment representatives as well as investors need to be objective in evaluating the criteria and offerings.

The Class A properties will normally have similar qualities. These qualities may be the physical locations with access to good schools, shopping, and other geographic assets.  Normally these properties can generate the highest rents in the submarket. The construction may be more recent (built with the past 10 years) and there may be little deferred maintenance.  The word luxury is used often (maybe too often). However, this may be draw for high-income tenants.

The Class B properties are still very functional and useful and a step down from Class A.  The age may be older (built 10-30 years ago typically).  The properties may be in need of maintenance and potentially have need of interior upgrades as well as exterior amenities. Because of these factors rents will be at mid-level.  However, there may be upside potential for sponsors. The upside may be created as a result of interior finish packages being installed that may create rent increases.

The Class C properties may be an option for renters who rent out of necessity.  The term work force housing occasionally comes up in this discussion.  The properties tend to be older, build 30-50 years ago.  With properties built that long ago there may be obsolescence either in the floor plans, HVAC, ceiling heights and other outdated physical aspects. The tenant base may also be lower income (paycheck to paycheck). These properties may be a great opportunity for value-add strategy.  The caution would be the extend of additional capital required to elevate to class B.  The physical location of the property may warrant a full investigation.

Class D properties once again are older and may include very low-income housing. Unfortunately, the location may be in higher crime areas. These areas also have additional requirements for security and increased maintenance. The vacancy rate and turnover may also be a concern for investors.

Each of the asset classes have a different risk profile. When DST sponsors are seeking properties for acquisition and ultimate packaging for individual investors the Class A and potentially Class B become the low hanging fruit so to speak.

Recent Activity
Recently there has been a compression of cap rates on the Multifamily asset.  Prices of the properties have escalated over the past year as individual investors as well as institutional investors seek out properties to add to their portfolios.  Multifamily properties have been the first choice of investment option for a variety of reasons.  There are many reasons for the appeal of this asset class. Individual investor may be interested in smaller properties that contain less than 20 units.  For an active ”hands-on” investor this may be manageable.

Typically, larger institutional investors look for projects that contain higher number of rental units.  Projects that have over 200 units (and upwards of 400 units) are preferred.  In addition, DST sponsors may package several complexes to offer assets that contain 800 units.  The dynamics of multiple units all with different lease expiration dates enable the property managers to respond to market rate increases.  The rental increases may only happen once per year on the renewal or on the turnover when a renter moves out. The property managers have the responsibility to minimize the down time and release the property. DST are passive investment that enable the individual investor to enjoy the benefits of ownership without dealing with property management, lease renewals, or capital improvements.

Each property may have unique features that may add to the overall appeal of the property.
The overall size of the property may be an advantage.  Technology has increased the ability for property managers to handle larger numbers of units.  When COVID occurred the management companies who embraced the electronic entry and digital lease and online application increased efficiencies.  The product mix meaning the numbers of studios, one bedroom, two bedrooms and potentially three bedrooms may be different depending on the market.  In urban areas the need for smaller units may be greater than suburban locations. When you look at a matrix of the DST offerings the majority of units are one and two bedrooms.

The community amenities could separate one asset from another.  Here is an example from one closed DST offering. Please note this not to represent what all Multifamily properties contain. “Community amenities may include a designer clubhouse with complimentary gourmet coffee bar; a workspace with private, fully supplied offices, dedicated coffee bar and conference room; resort-style pool with sun shelf and poolside cabanas; a state-of-the-art 24-hour fitness and yoga/cross training center with fitness on-demand kiosk; weekly onsite fitness classes; community iMac and resident printer station; a 24-hour access-controlled package room; multiple outdoor grilling stations; Wi-Fi access throughout the clubhouse and common areas; a family hangout and kids play area; valet waste and recycling; a social room with poker table and shuffleboard; an outdoor pavilion with lounge seating and a ping pong table; a fenced pet park; a pet spa with multiple wash stations and a grooming table; car charging stations; outdoor courtyard with hammocks and firepit; controlled access gated community; 24-hour onsite community market; private garages and storage; and elevator access”.

The physical location of the property may be another important feature.
Many potential tenants want to know how close the shopping is, restaurants, employment opportunities, school quality and proximity, and other external amenities.

There may also be regional features such as a highly educated population of residents within a certain radius on the property. Having an educated workforce may assist companies looking to relocate which in turn could bring an increase of jobs which benefits the overall community.

One of the metrics some real estate professionals use what is known as the Yardi Matrix© which identifies long term occupancy in the property’s submarket. This is not the only element of evaluation but may indicate stability in the marketplace.

The sponsor’s experience may also be a competitive advantage.  The overall question regarding the sponsor may be do they specialize in acquisition development, management and reposition if real estate investment assets.

We will expand on other asset classes in future sections of the Educational Series B DST Asset Classifications. The next topic of discussion will be Student Housing.  This is similar in many ways to Multifamily and at one time was a subsection of Multifamily.

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