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 firstname.lastname@example.org.
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.
NAMCOA® – Naples Asset Management Company®, LLC