Delaware Statutory Trust DST 1031 Difficulty Giving up control

53 Replies

Originally posted by @Amit M. :

@Isaac S. so you know what the options are once a DST matures? Is it usually a cash out, and you pretty much have to buy into new DST's to defer your gains again? Or maybe they offer the option to roll over and stay in it, if they were able to add value, increase cashflow, etc., making the long term return is favorable?

I ask because the benefit of diversifying into several DST's is mitigated in the future if you need to roll gains over, as now you're chasing different maturity dates and smaller amounts. I'd be harder, for instance, to roll over to a prime NNN property with your assets diversified over several DST's.

Anyone else, also feel free to chime in!

Yeah, that's just it...when you talk to the DST sales advisors, they always say you should roll over into other new offerings, ideally with more appreciation than the previous has left at maturity.

Yes, you are absolutely correct about PROS/CONS of DST diversification and repositioning out of them.

I personally came to the conclusion, that they are more ideal for partial investing....for example, I sell my upleg for 1.2m and 1031 into a property or two that are maybe worth 1.1 and then 1031 the $100k difference into a DST, to avoid any boot tax. I think of it as more versatile Plan b, or extra option to help keep flexible with any partial amounts that are not enough to invest alone. I don't think I would want to be 100% of my real estate as DST.

Hope this helps.

@Mike Jacobson

Hey Mike,

I recently got an up vote on one of the post from this thread, and I re-read one of your posts and it made want to check in and see what the last 8 months experience with DST was?

Thanks in advance for your feedback!

Isaac

@Isaac S 

Returns have been very close to what was stated in the ppm's. One of them lowered the monthly payout to the same as previous year because it didn't meet projections. It was supposed to go up about 1/4 % I was very happy with my tax return this year. Which way more than made up for it. So far I still love the DST's. My priority right now. Is freedom, not maximizing every dollar with my labor. That of course is something each of us must decide at what age is enough enough. For me the number was debt free and 15k per month. I hope this helps.

Mike

@Mike Jacobson thanks for keeping us in the loop. It’s nice to get a follow up, as you usually don’t hear from the marketing people/sponsors what happens after someone invests in a particular project. 

How did you find the reporting? I’m assuming it was quarterly, but did you also get frank assessments, upcoming goals, etc? Or just ‘here’s your quarterly profit’ type of thing?

I also think regarding diversification (a strength of DST vs STNL) is that you might as well stay diversified with future DSTs going forwards. Meaning, I think you have to choose your path a priori of either focusing on direct NNN ownership or get a slew of diversified DSTs. Only variant is if you have leftover boot on a NNN purchase, you can get a one off DST to close that gap. I just wonder how many investors with several $millions actually go for only DSTs as their primary portfolio?

@Amit M. The company that has the best communication of the DST's that I have is Passco. They even send out notifications of property status if hurricanes are headed toward a property and their plan. Reminders that they are covered by insurance and have a plan in place for quick recovery if something did happen. Annually most DST's give budget, past year performance, Variance to projected, and forecast of future. With Passco who missed a projection, they discussed what changes they have made and are making to correct the situation. I went all in with the DST's. Over 2m. I diversified between 8 investments, 7 of them being DST's. My "DST Guy" informed me that with that diversification...they will not all come to an end at the same time. So I will not have the chunk of cash to pull out and to something big. With diversification I don't worry to much. I have always taken chances.

@christopher brown I am not the best at the depreciation calculations. I tend to use round about numbers. (sometimes that gets me in trouble). I just had the best tax return year ever. ex. If I have a million in cash in the DST's and I carry another million in non-recourse debt, I get to write off and depreciate the whole 2 against my 1 mill invested. This is how I understand it, but I would get others to input the accurate summary of how this works. They tend to flip at 5 to 7 years when the curve on depreciate value and time come together???? way over my head...

I'm leaving for a trip to Japan right now.  If I don't respond right away.  Sorry.

Mike

@Isaac S. I always like to say that a suitable candidate for a DST must fit the profile. That being said, it has to be somebody willing to give up control and let go of the reins and collect that mailbox money. Either that or somebody that needs help matching debt and equity, needs a 45 day back up ID or has scraps of equity left over with their QI. Regardless, if you go thE DST route I always strongly suggest going with the rock solid sponsors that have a track record in the space. My two cents anyway 👍

I find it more rare for people retired with money to go all in with a DST and give up full control like that. As mentioned lots of additional boot money or if someone comes to me with a 1031 exchange and 250k they will be looking at a crap rural property or junk tenant with bad financing if they do not want to add any additional funds to the exchange.

It can make sense for that person to take the 250k and own a partial amount of a 10 million DST property they could not buy on their own. DST are heavy fee laden because of the way the companies have to package and sell them to make money.

Some of my clients instead might look at zero cash flow properties with pay down/re-advance features where they put a nominal amount in for equity requirement say 15 to 20%. This way if 1031 proceeds are 50% of the purchase amount then 30 to 35% of funds are re-advanced out after closing keeping the 1031 exchange intact. This way the investor has a quality property where all the payment is going to the mortgage so equity builds up fast and they can take the re-advanced funds and WAIT for the right opportunity for extra yield plays. 

@Rob Pecha Thanks for the two cents. Yeah, I agree with you. When I first started the thread I was just learning about DST's and my knee jerk reaction was to 1031 my primary asset(37 unit apartment building in Hollywood, with very little debt) and dump all the appreciation into the DST, and walk away from toilets, trash, tenants. I must confess that I still try and convince myself that it would be a safe and profitable play, and the more I keep track of the reputable larger sponsors, like PassCo and Inland, the more comfortable I get. Also, I think the various DST asset types and regions, has required that I learn about and pay more attention to micro/macro-economic conditions and regional RE Investment variables that I did not focus on, in the past.

I'm curious what "the profile" of a DST investor is? And/or a rough break down of what percentage of DST investors are in any given profile?

@Joel Owens Thanks for chiming in! I really like reading your posts and I'm still very thankful for the few times we have talked on the phone, and I look forward to possibly working with you in the future. Reading all your posts on BP helps me to indirectly get to know you, and I really like your NO BS style and high level of knowledge about the topics you post about.

ZCF is pretty advanced financing method, for me, and I like the concept for the exact reason you mentioned, I just get nervous about anything that is highly leveraged and then the phantom income in 7-12 years, risk of the asset going dark if it's a STNL, etc, etc...I have a basic idea of the pros and cons of the ZCF structure, but, I need to learn more and/or have someone hold my hand through a detailed analysis of how it would apply to my specific situation and how the cons are mitigated.

Hows your schedule been lately? Working on any projects that would make sense for my situation? Or any interesting project in general?

Hi Isaac,

Business is great. I would have to see where you are at currently with things since we last talked to see what might make sense for you.   

Originally posted by @Joel Owens :

Hi Isaac,

Business is great. I would have to see where you are at currently with things since we last talked to see what might make sense for you.   

 I'm sending you a direct email shortly to update you.

I am new to BP. Wow, like drinking from a fire hose. :-) I have a 1031 client looking for replacement options. I've done multiple exchanges but never into a DST. They will have $1.7m to roll. Probably wouldn't put it all into DSTs but like it as a plan B if we don't find enough acceptable direct investment options. I see Passco, AEI, Bourne, Moody recommended by posters. Anyone familiar with Realized1031 or 1031CrowdFunding?

@Gregg Schoh I am new to BP too! Welcome :)! DSTs as a plan B is a great idea. I recommend my clients identify at least 1 DST to serve as a back up when they are completing a 1031 exchange. Recently, my client's exchange was "saved" by a DST because the direct investment option fell through on Day 60 of the exchange. He successfully completed his exchange by investing in the DST.

From looking at their websites, Realized 1031 and 1031CrowdFunding are financial advisors who sell various DSTs. They are not the real estate sponsors (like Passco, AEI, etc). 

In regards to selecting DST real estate sponsors, I recommend my clients work with reputable companies, with years of experience, and a good track record of results. Inland is the largest DST sponsor in the market. They syndicate about 25-30% of all DST. Passco has a large market share as well, about 10% of all DSTs. My clients and I have had great experiences working with Bluerock. They have an impressive track record.

Great conversation. To set the record 1031 Crowdfunding is a sponsor in Senior Housing. The principals have been in the Senior Housing space for 15 years. The principals have also been involved in syndicating over $1 billion in industrial real estate as well as Senior Housing and has been in the Financial Services industry since 2001. 1031 Crowdfunding has the largest inventory of DST's in the country.

Inland,Passco are good sponsors and great people. We at 1031CF analyze deals based on the asset type geographical location and it's economic ability to overcome the upfront expense so that principle can attempt to be protected prior to suggesting any DST.

We are licensed advisors but also have over 20 years in the commercial real estate.

Again great conversation!

@Isaac S. I would say that among the profiles of DST investors I personally encounter in my practice, approximately 50-60% fall into those that flat out no longer want to deal with the TTTs, while the remaining 50-40% are scattered amongst A) those that need a backup scenario for their 45 day ID, B) those that need help matching up their debt/equity requirements and lastly C) those that have boot left to deploy after their primary choice(es). Simple as that, at least in my experience.

@Rob Pecha Thanks for the breakdown. Since I originally posted this thread, I have had time to think about it. Your breakdown makes perfect sense and is actually the exact way I currently view the DST financial instrument.

DST are a great tool for the common 1031 situations you described, but for very large amounts of equity there are competing STNL MTNL investments, that get me enough removed from the terrible T's, and satisfy my risk concerns, along with having self control of exit and usually better yields.

When I first started this thread, I really was hyper focused on passivity, but I have tried to implement more immediate and less drastic measures to help reduce the stress, so I can hang with my current primary asset and squeeze a good amount of appreciation, that is still available.

Thanks for contributing and best of luck!

NEWBY (here) - four years experience with DST investments

Our DST portfolio includes 11 investments in 8 states, of 5 different sorts of properties. We like the diversity, performance, hands-free stability, and - of course - income.

However, within that portfolio are some problem children. Madison (senior living) and Nelson (student housing) have suffered from a combination of poor planning and poor execution, as our income from those investments has either stopped or diminished. The overall portfolio, however, is doing well at >6% tax-free (plus appreciation).

@Henry Eisenson Hi and thanks for that info. Do you mind sharing which DST company(s) you are working with? Also, what do you mean by "tax free" gain, and did they provide you with estimated appreciation numbers? Thanks

Not tax-free gain. It's tax-free income due to sheltering. Taxes on GAIN are deferrable via 1031.

IN OUR EXPERIENCE
Good sponsors: REVA, PASSCO, ExchangeRight, Nexpoint
Bad ones: Nelson Partners, Madison
So-so: First Capital, NB Private Capital

As I recall, offering memoranda included property descriptions, income expectations, and appreciation targets.

I sold a property a couple of years ago and exchanged into 5 different DST's. They can make sense depending on your tax liability, as it did for me. As mentioned, the bigger Sponsors are very professional and report very well. You get a financial statement (not a K-1) that clearly lists all the info you need for your taxes. The fees are high - especially the broker fee. But you can try and negotiate that down. There is no Promote and no investment from the Sponsor (usually) - so there is no alignment of interest, but the better Sponsors want to keep their reputation. Usually the properties are newer class A as they can't hold too much cash reserves for repairs as it creates too much of a cash drag and reduces IRR. They are somewhat limited with the DST structure which can add risk, so the better Sponsors know how to manage that. Investing as an LP in a non DST investment like a standard syndication offers less fees, more options, great Sponsors, 1031 exchanges, QOZ's, Funds, every asset class etc... 1031's are limited, though especially for your initial investment. You can find some that are debt free, but mostly those are NNN. I stayed mostly with Multifamily as other sectors like Student housing, Senior care, Hospitality and NNN have too much risk for me. I like the diversity and like how they will sell off at different times. So instead of one large cap gain on one property, it is split into 5. This will potentially allow me to pay no tax on the capital gain as I will be in a low enough tax bracket to pay 0 capital gain.

Bottom line is they are very convenient, and simple but more restrictive and higher fees, resulting in a sub-optimal IRR.


@Isaac S. what route did you end up taking? Did you go into a DST? Has your property sold yet or in escrow? Curious to know the route you are going down after reading through this thread.

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