1031 Exchange - DST?

[Chris Stratton]

Hi - we're getting ready to "push the button" with Kay Properties on a 1031 finance purchase of a $100,000 offering. Still doing a little Due Diligence. This will be a first DST purchase for us, and the 3rd time involved with a 1031 exchange. Two questions come to mind: 1) does anyone have any experience with Kay Properties? If so - how did that go? 2) how are "assessments" handled w/ a DST? in other words, if the roof blows off a FedEx building, do they typically get a loan to replace it, or are the investors assessed? TIA!

Chris

[Paul Moore]

Hi @Carlos Ptriawan. My firm did launch a no-load DST last Fall and we (almost) filled it up quickly. So I would be happy to speak to this with no sales motive involved. Feel free to reach out to me to discuss what we've learned.

More importantly, one of our investors has invested in a bunch of them and recently raised an issue that I was unaware of until recently. According to him, some of the DST operators/brokers work together to sell off DST assets much sooner than planned. They hope to move their investors into a similar deal with similar returns and keep their capital gains deferral going. This sounds fine until one realizes they are paying all of the front-end broker loads and operator acquisition fees all over again. If you do this every three years, you've paid all of this three times in a decade. As opposed to finding a DST operator who holds for ten years and paying those fees once. Think about how these fees cut into capital gains! DST Investors should add this possibility into your due diligence checklist.

[Albert Wright]

Quote from @Adrian Lu:

Quote from @Albert Wright:

Thanks for clarifying Mindy! I purchased my DST via https://seracapital.com/1031-e...

Carl assisted me as a fiduciary consultant instead of a DST salesperson hoping to earn 6-10% commission on (actually out of) my investment. Once we identified the appropriate DST, I paid Sera Capital the prearranged flat fee and they instructed the DST sponsor to add 100% of the sales load into my investment.

 Hi Albert,

Thanks for this valuable info.  Would you mind updating us on how your DSTs have performed now that about 2 years have passed?  Would you have done anything differently?  I'm now where you were back in 2021, learning about DSTs for a 1031 exchange.  

-Adrian

I am quite pleased with my Capital Square DST. It's a mobile home park performing as advertised, which I hope the sponsor holds for quite a while.

[Robert Casper]

I have been trying to understand the Delaware Statutory Trust (DST) for a few months because it is 1031 eligible. I am troubled by the following at the moment.

1. I have been getting told by Registered Advisors(RA)/Registered Reps(RR) working under Broker Dealers (BD), the up front cost to buy into a DST runs 5-6% total for the joint BD&RA/RRas as specified in the PPM. I have been told the DST pays it and of course it gets factored into the DST cost and there is no other cost.Then along comes another RA/RR/BD and it says the cost is 7-11% and anyone telling me the cost is 5-6% is not telling the truth. What do you guys say?

2. Can anyone step to the plate and name the leading Broker Dealers in the DST space.

My exchange clock is ticking, so your insight would be greatly appreciated.

Robert C

[Carlos Ptriawan]

Quote from @Robert Casper:

I have been trying to understand the Delaware Statutory Trust (DST) for a few months because it is 1031 eligible. I am troubled by the following at the moment.

1. I have been getting told by Registered Advisors(RA)/Registered Reps(RR) working under Broker Dealers (BD), the up front cost to buy into a DST runs 5-6% total for the joint BD&RA/RRas as specified in the PPM. I have been told the DST pays it and of course it gets factored into the DST cost and there is no other cost.Then along comes another RA/RR/BD and it says the cost is 7-11% and anyone telling me the cost is 5-6% is not telling the truth. What do you guys say?

2. Can anyone step to the plate and name the leading Broker Dealers in the DST space.

My exchange clock is ticking, so your insight would be greatly appreciated.

Robert C

With DST you can't purchase directly to the seller where you should use broker, your out of pocket is typically 6-10%.
That also includes the upfront profit charges that the sponsor making.

Basically to delay the tax payment, you have to pay the other guy, for something that's cash flowing very miniscule and you have to repeat again after 3-5 years. Some properties are just being exchanged by the same type of sponsor LOL, from cap rate of 5.5 to cap rate of 5.35%. 

All these transaction where they actually "make money" out of our desperation to "delay tax payment".

[Albert Wright]

I strongly encourage NOT paying a RA or brokerage DST commission, which is why I used and recommend Sera Capital. They act as a fiduciary, and they charge a flat transaction fee regardless of investment amount.

[Robert Casper]

Quote from @Albert Wright:

I strongly encourage NOT paying a RA or brokerage DST commission, which is why I used and recommend Sera Capital. They act as a fiduciary, and they charge a flat transaction fee regardless of investment amount.

Why?

[Albert Wright]

Quote from @Robert Casper:

Quote from @Albert Wright:

I strongly encourage NOT paying a RA or brokerage DST commission, which is why I used and recommend Sera Capital. They act as a fiduciary, and they charge a flat transaction fee regardless of investment amount.

Why?

Fiduciary > salesman 

Flat fee < 5-11% commission

[Robert Casper]

Working under a Broker Dealer? Which one

Licenses you have? The #

Represent DSTs?

Which Sponsors/DSTs

[Carlos Ptriawan]

Quote from @Albert Wright:

I strongly encourage NOT paying a RA or brokerage DST commission, which is why I used and recommend Sera Capital. They act as a fiduciary, and they charge a flat transaction fee regardless of investment amount.

Sera is really great. You guys really have to read his explanation (and answer) to your *exact* question there.
But you should also know what you are doing.

He can prove it to you if the sponsor keep buying and selling MF within 2 - 3 years you are actually losing money with all the transaction cost.

[Robert Casper]

I think the BD/RIA is obligated to a total fee as per the PPM. Sponsors talk to each or see each others PPM and fees. What is the normal range of that fee as specified in the PPM when you buy?

I think some BD/RIA will discount that fee for the individual investor (like me). When they do, I think they can instruct the Sponsor DST to assign you more units for the amount discounted. What do you think?

When you roll one 1031 to another is there a turn fee for the BD/RIA with the same Sponsor?
Different Sponsor?

If you sell out of the 1031 is there an exit fee to BD/RIA or Sponsor.

Sera can contact me but it is almost too much on my plate.

[Carlos Ptriawan]

Quote from @Robert Casper:

I think the BD/RIA is obligated to a total fee as per the PPM. Sponsors talk to each or see each others PPM and fees. What is the normal range of that fee as specified in the PPM when you buy?

I think some BD/RIA will discount that fee for the individual investor (like me). When they do, I think they can instruct the Sponsor DST to assign you more units for the amount discounted. What do you think?

When you roll one 1031 to another is there a turn fee for the BD/RIA with the same Sponsor?
Different Sponsor?

If you sell out of the 1031 is there an exit fee to BD/RIA or Sponsor.

Sera can contact me but it is almost too much on my plate.

Albert in his comment above already mentioned what's going on. I'm just adding up the intricacies of transaction between these whole "DST".

[Brandon Bruckman]

This is becoming an interesting thread! I operate in the DST space. Here is some clarity on the more recent questions and comments:

- Upfront costs - pull a PPM and look at the use of proceeds.  All the costs are there.  

- Working with an RIA will reduce the upfront costs.  Shop around.  Pick out one you like. 

- DSTs don't turn over every 2-3 years unless there is significant appreciation. The average hold time of the largest DST sponsors since the inception of DST in 2004 is over 8 years.

- No one (RIA or BD) is taking an 11% commission.  Sales commissions in DSTs average 6%. 

[Robert ODowd]

Great info everyone, thanks !!!!

I read someone ask if there is an impartial book to educate the " average Joe " on THE COMPLETE DST UNBIASED STORY ????

If so PLEASE let me know as everything I get my hands on is published by one sponsor or another 

In the dark ,

Robert 

[Carlos Ptriawan]

Quote from @Robert ODowd:

Great info everyone, thanks !!!!

I read someone ask if there is an impartial book to educate the " average Joe " on THE COMPLETE DST UNBIASED STORY ????

If so PLEASE let me know as everything I get my hands on is published by one sponsor or another 

In the dark ,

Robert 

To make thing more complicated to you , one large broker now has opening a "secondary market" for DST with avg sale of 98-ish% from valuation. Just saying :-) I don't want to promote any business (including Sera vs other dealer), but just saying that thing also exist recently (which is good for us). Google it to find the broker name.

[Robert Casper]

Quote from @Brandon Bruckman:

This is becoming an interesting thread! I operate in the DST space. Here is some clarity on the more recent questions and comments:

- Upfront costs - pull a PPM and look at the use of proceeds.  All the costs are there.  

- Working with an RIA will reduce the upfront costs.  Shop around.  Pick out one you like. 

- DSTs don't turn over every 2-3 years unless there is significant appreciation. The average hold time of the largest DST sponsors since the inception of DST in 2004 is over 8 years.

- No one (RIA or BD) is taking an 11% commission.  Sales commissions in DSTs average 6%. 

What do you mean when you say working with an RIA will reduce costs? I am now understanding that if you the Registered "Rep" gets their 5-6% commission (exact spelled out in the PPM) that would be it. But if I, as an investor, want a Registered Advisor the DST would credit me operating units in lieu of the 5-6% and I would have to pay the RIA directly 1+%/yr, whatever their fee is for as long as the Trust is holding. If the average is 8yrs, that is 8+%. Let the DST pay the Registered Rep the upfront 5 or 6%, but be sure you are aligning with a rep that truly cares about your business and follows the investment and keeps you informed through its life. Some just take the money and disappear.

Averaging 8 yrs makes me want a PPM that promises to 721 UPREIT. I will want to continue to continue to defer the taxes but in an UPREIT. I am understanding I can convert Operating Partner Units in an UPREIT to REIT shares (taxable) but the benefit is I can sell any percentage of the operating partner units, paying taxes on only that percent I sold.

A friend that is a bank auditor, specializing in commercial real estate said:
operating costs should total about 30%, leaving NOI 70%

For us business people NOI in real estate is EBIDA (T left out as Taxes are an above the line expense)

Any know, does the DST have to produce audited financial statements

So now I feel I am better equipped to work with the RIRep and tackle the recommended PPM

[Carlos Ptriawan]

Quote from @Robert Casper:

Quote from @Brandon Bruckman:

This is becoming an interesting thread! I operate in the DST space. Here is some clarity on the more recent questions and comments:

- Upfront costs - pull a PPM and look at the use of proceeds.  All the costs are there.  

- Working with an RIA will reduce the upfront costs.  Shop around.  Pick out one you like. 

- DSTs don't turn over every 2-3 years unless there is significant appreciation. The average hold time of the largest DST sponsors since the inception of DST in 2004 is over 8 years.

- No one (RIA or BD) is taking an 11% commission.  Sales commissions in DSTs average 6%. 

What do you mean when you say working with an RIA will reduce costs? I am now understanding that if you the Registered "Rep" gets their 5-6% commission (exact spelled out in the PPM) that would be it. But if I, as an investor, want a Registered Advisor the DST would credit me operating units in lieu of the 5-6% and I would have to pay the RIA directly 1+%/yr, whatever their fee is for as long as the Trust is holding. If the average is 8yrs, that is 8+%. Let the DST pay the Registered Rep the upfront 5 or 6%, but be sure you are aligning with a rep that truly cares about your business and follows the investment and keeps you informed through its life. Some just take the money and disappear.

Averaging 8 yrs makes me want a PPM that promises to 721 UPREIT. I will want to continue to continue to defer the taxes but in an UPREIT. I am understanding I can convert Operating Partner Units in an UPREIT to REIT shares (taxable) but the benefit is I can sell any percentage of the operating partner units, paying taxes on only that percent I sold.

A friend that is a bank auditor, specializing in commercial real estate said:
operating costs should total about 30%, leaving NOI 70%

For us business people NOI in real estate is EBIDA (T left out as Taxes are an above the line expense)

Any know, does the DST have to produce audited financial statements

So now I feel I am better equipped to work with the RIRep and tackle the recommended PPM

If you really follow the track record of when these multi family unit being purchase and sell, average holding time is 3-4 years so you pay the premium in there and that's why how DST sponsor makes money. No 8 years LOL.

I already stopped listening to RIA or whatever, until they all open their sponsor track record LOL

The only advantage of having DST is really because it's just like investing to MF Class A, but the yield and cap is so volatile right now, I bet the safest DST would be the one with less than fifty percent LTV.

Best strategy rather than DST.... is just sell primary, move to rental, sell rental, and buy another primary if equity is already less than 40%.

[Brandon Bruckman]

Quote from @Carlos Ptriawan:

Quote from @Robert Casper:

Quote from @Brandon Bruckman:

This is becoming an interesting thread! I operate in the DST space. Here is some clarity on the more recent questions and comments:

- Upfront costs - pull a PPM and look at the use of proceeds.  All the costs are there.  

- Working with an RIA will reduce the upfront costs.  Shop around.  Pick out one you like. 

- DSTs don't turn over every 2-3 years unless there is significant appreciation. The average hold time of the largest DST sponsors since the inception of DST in 2004 is over 8 years.

- No one (RIA or BD) is taking an 11% commission.  Sales commissions in DSTs average 6%. 

What do you mean when you say working with an RIA will reduce costs? I am now understanding that if you the Registered "Rep" gets their 5-6% commission (exact spelled out in the PPM) that would be it. But if I, as an investor, want a Registered Advisor the DST would credit me operating units in lieu of the 5-6% and I would have to pay the RIA directly 1+%/yr, whatever their fee is for as long as the Trust is holding. If the average is 8yrs, that is 8+%. Let the DST pay the Registered Rep the upfront 5 or 6%, but be sure you are aligning with a rep that truly cares about your business and follows the investment and keeps you informed through its life. Some just take the money and disappear.

Averaging 8 yrs makes me want a PPM that promises to 721 UPREIT. I will want to continue to continue to defer the taxes but in an UPREIT. I am understanding I can convert Operating Partner Units in an UPREIT to REIT shares (taxable) but the benefit is I can sell any percentage of the operating partner units, paying taxes on only that percent I sold.

A friend that is a bank auditor, specializing in commercial real estate said:
operating costs should total about 30%, leaving NOI 70%

For us business people NOI in real estate is EBIDA (T left out as Taxes are an above the line expense)

Any know, does the DST have to produce audited financial statements

So now I feel I am better equipped to work with the RIRep and tackle the recommended PPM

If you really follow the track record of when these multi family unit being purchase and sell, average holding time is 3-4 years so you pay the premium in there and that's why how DST sponsor makes money. No 8 years LOL.

I already stopped listening to RIA or whatever, until they all open their sponsor track record LOL

The only advantage of having DST is really because it's just like investing to MF Class A, but the yield and cap is so volatile right now, I bet the safest DST would be the one with less than fifty percent LTV.

Best strategy rather than DST.... is just sell primary, move to rental, sell rental, and buy another primary if equity is already less than 40%.

Track records are in every PPM.  Very easy to find.  

Agree with your comments on multifamily.  We see lower LTVs and a drift away from MF properties all together. 

[Tony Guardado]

Quote from @Robert ODowd:

Great info everyone, thanks !!!!

I read someone ask if there is an impartial book to educate the " average Joe " on THE COMPLETE DST UNBIASED STORY ????

If so PLEASE let me know as everything I get my hands on is published by one sponsor or another 

In the dark ,

Robert 

[Sean O'Keefe]

Curious to hear what @Dave Foster has to say on this. 

[Arthur Savery]

Quote from @Chris Stratton:

Hi Guy,

We did buy into a couple of units with a DST vendor (Kay Prop). Experience has been positive, and we've had excellent service from Kay Properties. One was a straight-up purchase, the other included a loan component. The "loan component" means, I believe, that on selling, my basis is higher, so to continue, I would have to buy another loan component DST or face some same-year tax consequence. The 'buy in' costs are high, no doubt. The checks have, so far, just kept rolling in. We had a very slight increase recently in the smaller of the two investments. Honestly, not sure I would go/do something else different if these ended. Chris

Chris, Would you mind posting a current update on your experience with DSTs and Kay Properties? Thanks much!

[Danielle S.]

I'd be interested in hearing how this worked out for you five years later. I'm on track for a 1031 DST.

[Danielle S.]

Did you end up doing this? I'd be interested in learning how it worked out for you.