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.

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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.

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

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.

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.
Use all the proceeds. If you receive $1,000,000 in proceeds all the proceeds need to be used.
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.

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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Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Avoiding Rookie Mistakes in a 1031 Exchange

Content

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.

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.

NAMCOA’s corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC

June 16, 2022- DST.EDU Series B- Part 8 Industrial Asset Class

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

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

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

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

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

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

Fast facts on Industrial Asset class

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

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

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

Investment structure will vary depending on the sponsor offering.

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

Tenant quality

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

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

June 8, 2022- DST.EDU (Series B- Part 7) Self Storage Asset Class

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

Self-Storage Asset Classification Discussion

By Al DiNicola, AIF®
June 8, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

Self-storage has been a stable commercial asset over the years and the acquisition of existing facilities and development of new facilities by public and private Real Estate Investment Trusts (REITS) has been well documented. Self-Storage is also packaged as a Delaware Statutory Trust (DST) affording certain accredited investors to gain access to this sector. In addition, 1031 tax deferred exchange investors (via DST) may also obtain an interest in this asset class. Over the years we have seen volatility in the stock market and this volatility moves investors to seek alternative investments. While the investment into self-storage may lack the sizzle of watching the closing bell reports the alternative investment may provide an even keel in a sea of uncertainty. The non-correlated assets may also provide a foundation to an overall portfolio.

Self-storage does seem to consistently throw off cash flow and potential returns at the end of the holding period. Investors seeking diversification with a non-correlated holding often look to real estate and self-storage is an easy asset to obtain. Investors may also want to own an interest in a tangible asset with the benefits of tax favored returns. We often seek to include a suggestion of a self-storage DST in an investor portfolio. That may be easier said than done. There is the unbalanced number of self-storage offerings as compared to the high number of multifamily assets. The other challenge is the timing of when an investor is ready to purchase.

To appreciate self-storage, we need to take a few steps back to understand the asset class.

History & Background
The potential for excellent returns is very possible in the interesting asset class of Self-storage. Over the years self-storage has been resistant to recession. Homeowners amid recession and financial hardships may be faced with losing their homes to foreclosure or downsizing to apartments. When looking for a place to keep their items the logical solution was self-storage units. This became the holding place until times got better. We Americans have a lot of “stuff”. There is some type of hesitancy for us to simply throw things away. The unwillingness to eliminate items we are keeping (for whatever reason) simply fills up closets, garages, and other areas in the home. Two car garages may be filled with everything but cars. Estimates are that one-third of storage space is filled with items that have been there for over three years. This asset class has produced high yields, experienced lower declines and default ratios when compared to other asset classes. Self-storage is a sizable asset class for a relatively new industry. Mom-and-pop operators dominated the industry in the early years. Today the self-storage industry ownership is fragmented, with 31.2% of self-storage space (by rentable square footage) owned by six public companies, 16.5% owned by the next top 94 operators, and 52.3% is still owned by small operators. (Self-Storage Almanac, 2021).

Current Statistics:
According to Self-Storage Almanac, annual self-storage revenue rose to $39.5 billion in 2021.

Number of self-storage facilities in the US: 49,233
Amount of self-storage space per capita in the US: 5.9 square feet per capita
Percentage of U.S. households that rent a self-storage unit: 10.6%
Total rental self-storage space: 1.9 billion square feet

Trends
Today sponsors of DST self-storage is gaining popularity and some sponsors are vertically integrated with the potential exit strategy (of the DST at full cycle) would be the acquisition by an associated REIT. One of the top performing sectors recently have been self-storage REITs. The DST offering may be a single site location which tend to be smaller in dollar terms (under $20 million) to a portfolio of several locations that may include larger offerings (over $100 million).

The newer facilities tend to be climate-controlled. There are many factors for this and driven by the consumer wanting a controlled environment that avoids mold and musty effects on their belongings. Climate control facilities can charge a premium. There may be additional revenue obtain from other sources such as truck rental, shipping and other services. Not all facilities have the additional space (i. e. urban locations) to provide these services.

Self-storage facilities and locations thrive on population growth. Population growth is a logical driver for multifamily and residential needs and storage demand and is closely aligned with these asset classes. Strategically placing a storage facility in a densely populated area (or area expecting growth) is the key element.

The self-storage industry is a sub-sector of commercial real estate. The growth of the industry is expected to be positive during the forecast period, due to the trends of increased urbanization and improved economic outlook, across regions, which have led to new business growth.

Demands
According to the US Census Bureau, construction spending on self-storage has increased by 584% from January 2015 to January 2020. The United States self-storage market is expected to register a compound annual growth rate (CAGR) of 2.02% over the forecast period 2021 – 2026. The COVID-19 pandemic created disruption in many industries. However, there are opportunities for investors to do well during recession and into recovery. The resiliency of the Self-storage asset class is to be noted. People continue to use self-storage and operating business fundamentals make it very attractive.

Some states and business have seen expansion after the impacts of the pandemic. As states scale back some of their COVID-19 restrictions the self-storage sector is returning to higher levels.

How locations are developed and how they are operated are seeing changes.
The locations of self-storage facilities have move closer to the customers as there has been population growth in the urban area. Granted there has been COVID migration from certain states but that may have been a reaction to certain states locking down. That is another topic. Empty nesters as well as Millennials (as demographic groups) have moved to the urban areas. Many of the dwelling units in urban areas are smaller in square footage and provide little or no additional storage.

Prior to COVID the move back to the city (some reference as Increased Urbanization) in conjunction with the delivery of small living units or apartments created a real demand for storage solutions. Past DST portfolio offerings with multiple locations in large cities have done exceptionally well. Single site offerings are also in demand. These offerings provide for smaller investors, ether cash investors or 1031 tax deferred exchange investors, an opportunity to participate in this asset class.

Move to the Cities

Cities welcome the increased urbanization that is breathing life into certain areas. Not all cities are experiencing the same increase. However, this increase is a major factor driving market growth.
When people downsize, they are faced with the reality of what to do with all the possessions that will not fit into the smaller living space. This equates to increased demands for storage. Well located self-storage units provide a convenient way of freeing up space in the new urban living environments. Items that are not needed or rarely used fill the voids of self-storage spaces.
All new self-storage facilities are not purpose built. Vacant retail and office locations can be converted into unique and interesting storage solutions in a variety of locations. Old larger big box stored with high ceilings have been converted into self-storage facilities thus repurposing a dark building.

Every sector of real estate has experienced advancement in technology and self-storage is taking advantage of those advancements. Security is a prime issue with consumers who seek access to their storage units. State of the art CCTV monitored access and other innovations add to the overall security and customer experience that will retain current renters as well as attract new users.

Conclusion
Self-storage has been a bellwether asset class over the years. This may be an asset class to understand for potential inclusion in your investment portfolio. Participating in a self-storage DST may provide a solution for consideration.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Disclosure Links
• MSC-BD, LLC – Form CRS Customer Relationship Summary
• NAMCOA Disclosure Brochures
• Al DiNicola NAMCOA ADV2B
• NAMCOA DOL Disclosure 2-17-22

June 1, 2022- DST.EDU (Series B- Part 6) Single Family Rental & Build for Rent

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

SFR / BFR Asset Classification Discussion

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

SFR, BTR, BFR all offer a new alternative

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

Emerging Trend

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

Lack of Housing

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

Technology Rules

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

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

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

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

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

NAMCOA® – Naples Asset Management Company®, LLC

Disclosure Links

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.

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 20, 2022- DST Education Series B- Asset Classification Discussion Part 4 MHC

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

Part 4: Manufactured Housing (MHC) Asset Classification

By Al DiNicola, AIF®
May 20, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC

You may have driven by locations that have a combination of trailers, campers and other vehicles all sharing the same plot of land. The reference to the “trailer park” may have been the subject of many comedians including disparaging remarks over the years. There is a noticeable difference between the trailer park structure and the Manufacture Housing Communities. At one time the investment into manufactured housing may have been thought of as a marginal asset class. There has been an interesting chain of events leading to an increase popularity not only by the residents who call these locations home, but investors as well. The facts are that factory-built housing (as a segment of real estate) has become one of the asset classes that has been very stable. There is a tremendous amount of interest in this asset class. Many experts state there is a bright future for manufactured housing communities. Since 2000 the manufactured housing section (according to Green Street Advisors) has not experienced a decline in net operating income (NOI) when doing a year over year comparison. This was the only major commercial real estate asset class to return this type of result. Delaware Statutory Trust (DST) sponsors have added this asset class to their offerings over the past few years with exciting results.

What is important is to have an overall understanding of the asset class. The manufactured housing communities (MHCs) are different from many of the older Mobile

homes sitting in a variety of locations. Those older homes are now obsolete due to HUD policy changes in 1976. Fortunately, many of these older homes have been or will be replaced. The new MHC settings typically have more amenities as well as a sense of community than the old trailer parks. Typically, in a MHC, there is a clubhouse, swimming pool, and other social amenities included in the community.

Demographics are important.

There is an estimated 22 million people living in manufactured or mobile homes in the U.S. Numbers are tracked by the Manufactured Housing Institute.
Manufactured housing provides shelter for roughly 7% of the U.S. population.
There are approximately 43,000 land-leased communities that contain 4.3 million rental sites.
The new homes are manufactured in controlled facilities.
On last count by the institute there were 136 production facilities in the US. These homes or production unit typically are about 1,500 square feet and the 2019 price was about $82,000.

MHC communities still provide the most affordable price point for housing, and they provide exceptionally affordable housing. In addition, MHC communities combine the best features of the rental model and ownership. Residents own their own home and have their own private yard, but only pay a modest lot rent and have use of substantial common areas and amenities.

Rental Income
The property owner (or DST sponsor through a master tenant agreement) rents plots of land to individuals who have a park model home built (delivered) to the property.

This is a land lease to the tenant.
The tenant (who owns the structure) pays the monthly rent for the land as well as other potential expenses such as a pass through on taxes in certain jurisdiction.
The tenant insures the property thus eliminating the need for the landowner to insure all the structures.
In the event of a catastrophic loss the tenant’s insurance would handle the repairs or replacement of the home.
Insurance would be needed on any of the community wide facilities such as clubhouses and any other structures.
The landowner is also responsible for the maintenance of the roads and other facilities.
Occupancy tends to be higher than other multi family assets.
Delinquencies are low and many states have laws on the books that favor the landlord.

Economic Drivers:
Interest by investors for MHC asset remained high in 2021. There was a compression in cap rates but investors as well as Delaware Statutory Trust sponsors continued to seek acquisition in key locations. The steady growth was fueled by strong demand.

There are unique issues that the MHC sector is experiencing.

Today’s factory-built homes increasingly resemble stick-built homes, with luxury finishes and architectural details that mimic conventional-home designs.
The new supply of land for development is virtually nonexistent. With this scarcity of new supply, both in terms of new communities and new homes within existing properties creates pressure on acquisition prices.
New production of homes or park models has been hampered by the discrepancies in supply chain issues. This may have prevented the replacement of older homes within the communities with newer ones where there were empty lots.
Older residents living in dated home who pass away leave the structure to the heirs. While the older homes may be placed on the resale market, many times these much older homes have little residual value when compared to the newer built homes.
There also are the continued image problems with the construction of new communities and the reluctance on the part of municipalities to accept this much needed housing stock. Municipalities, zoning boards and neighborhood associations often show great resistance to allowing new communities to be developed or expanded. Once again, this position may be as a result of old stereotypes.

Affordable Housing Solution.
A great solution for the affordable housing crisis could be manufactured housing. Local governments complain about the need for more affordable housing, but generally speaking they tend to hinder the development of manufactured home communities. That is a problem. There are locations where MHC is making inroads such as Albuquerque, N.M., Winston-Salem, N.C., and Florence, S.C.

With the housing crisis what is needed is quicker permitting that can create an increase in the numbers of homes for purchase or rent. Manufactured housing, in many US locations is the only truly affordable, nonsubsidized form of detached housing available.

Market Performance.
Which U.S. manufactured housing markets performed the best and why? Four and five-star Florida locations in age-restricted communities performed the best. Rust bowl “trailer parks” populated by lower-income residents performed the worst. Many of the Florida facilities were owned for decades by mom-and-pop owners. Frequently this type of facility becomes the target for acquisition, repositioning, physical improvements and structured as a DST offering.

The residents in high-end, age-restricted communities in Florida are retired and are not as dependent on employment to pay their lot rent, and they have retirement income and savings. The pandemic was a year of “business as usual” for them.

Compare relatively well-to-do retired residents to working-class residents employed at the lower end of the service sector. The residents working in restaurants and factories that closed during the pandemic experienced difficulty paying rents if in apartments. The same situation may occur with working-class residents struggling to pay their lot rent, while wealthier retirees had no financial issues induced by the pandemic.

Even during the downturn caused by the COVID-19 pandemic strong consumer demand coupled with low supply is why MHCs have thrived regardless of economic trends. Manufactured-housing real estate investment trusts (REITs) have outperformed the broader REIT index over the past several years. This measure of the sector’s investment strength is another reason to include MHC as an addition to an investment portfolio.

Summary
Manufactured housing is also affordable, typically costing less money to develop versus site-built homes (according to National Real Estate Investor). This asset class addresses the nation’s housing affordability crisis.

The quality and reputation of MHCs have dramatically increased. As communities have improved in design and image, as well as proven to be a low-risk investment, real estate investment trusts, pension plans and other institutional investors have included them in their portfolios. (The Outlook: Manufactured Home Communities” Midyear 2021, Marcus & Millchap).

Significant barriers to entry exist in developing new MHCs, as zoning and entitlements are difficult to obtain. The number of MHCs continues declining, as old parks are converted to new uses, leading to very limited supply. This lack of inventory means vacancies continue to tighten. This is especially the case in age-restricted communities. More than 10,000 people turn 65 years old each day. In addition, households retiring to warmer climates or that are seeking out a second residence are also boosting demand, especially in the Sun Belt states. Demand is anticipated to continue for manufactured homes, meaning an increase in both rents and market value.

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

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.

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NAMCOA® – Naples Asset Management Company®, LLC