All Forum Posts by: Jon Taylor

It's not a DST

It's an income fund structured as an LLC. It's not a 1031 investment.

DSTs have many structural components that need to be well understood prior to investing. The “load” is an important one.

The load is broken into three major parts:

1) Acquisition related costs (something you’d likely pay anyway)

2) Reserves (money set aside upfront - still accountable to the investor and returned if unused - to be used to operate the business plan of the Trust). I’ve seen the “reserves” category balloon to over 25% of the raise if the business model includes major value-add tenant improvement opportunities.

3) Broker related commissions. Usually 2.5% - 3.5% of the total deal. Typically that is paid to a broker-dealer and is included in the total raise, slightly decreasing the investor CAP rate. Alternatively, there are some RIA's who will take a smaller up front fee (or no fee at all) and instead take an AUM fee of .05 - 1% of the deal every year, taken out of monthly income, for the life of the DST (typically 5-7 years).

I always run the scenario a couple different ways - including paying the tax and getting out of the 1031 cycle - and let the math create clarity in the decision making process.

@Jim Hwang,

What state do you live in?

@Cameron Snyder -
It seems like you have received good advice thus far, but to summarize:

You can use your net proceeds at the time of close to paying off any outstanding loan on your property. If you intend to do a 1031 exchange and defer all of your gain you need to replace the net value of what was sold and use all of the net proceeds to do so. If you invested in 3 DSTs, it's likely that you were able to replace the debt on your relinquished property with new non-recourse debt within the DSTs.

You asked, "Did this HELOC transfer to the new properties or was something overlooked during the sale 3 years ago?" Do you know what the bank used as collateral for the HELOC? Often times the collateral is your primary residence - as the bank carries less risk on your primary than on your investment properties. If it was your primary then you likely still have the HELOC available. And you can use it to buy another investment property, pay for your daughter's wedding, or buy a mid-life crisis toy. None of that will matter to the IRS, and none of that will impact your previous 1031 exchange.

@Sanjeev Kaushik -

@Dave Foster is spot on. But this doesn't mean a tax deferred exchange is not possible. It just means you have a complicated path to follow. There are ways for you to dissolve your LLC and form a TIC. Or, the LLC can do the exchange and the members can achieve their goals from within the partnership agreement.

Happy to chat if you’d like. DM me if you’d like to discuss it further.

Fees aren't bad actually. That stigma in DSTs has really driven the fees down to be comparable to a typical real estate transaction - if you factor both sides of the transaction... The real problem is that values are still so high and the cash flow is taken up by interest rates that have doubled. Seems like they are betting on residential rent continuing to go up at record-high growth rates. Tough bet to make.

3.5 - 5

IMO DSTs have extremely low cash flow targets. If it's not a motivated seller, I don't think DSTs are going to push anyone over the edge in this market. 

@Matthew Shedd -

In order to provide good advice, it'd be helpful to know quite a bit more about your financial situation, BUT, here is an alternative idea that we recently worked through with an investor. It may not be relevant to your situation, but for the benefit of all, I'll describe the scenario.

An investor came with a +$1M gain (and no basis left) to our office with the primary goal of 1031 exchange. Tax deferral was the primary goal, followed by total return over a 10+ year period. Immediate cash flow wasn't a priority.  

The investor didn't want a personal rehab project, and everything that was fully stabilized seemed to us like it was priced pretty aggressively. The only thing we found that was somewhat interesting was a syndicated deal with extremely stable (national credit tenant) cash flow of 5% and a short-term 3 year hold period, but little to no appreciation. The original thought was to 1031 into that as a parking place, and wait for a better buyer's market in 3 years to get more aggressive with the subsequent exchange.

But, as we dug into the investor's balance sheet and tax returns, we found significant losses from 2008 that had been carried forward, unused. Ultimately, we let the 45-day window expire and took the net proceeds as boot because we identified a handful of Opportunity Zone investments that were pretty attractive and met the needs of the investor.

We then identified a basket of OZ funds with various business models to diversify risk. An opportunity zone investment can defer the taxable gain through 2026. plus, any tax on the appreciation in the fund will be avoided if the investment is held for over 10 years.  

The tax man will come for the original gain in 2026, but we'll use the loss-carry forward at that point. 

Depending on your loss-carry forward, this could be an interesting *alternative* to a 1031. Hope that was helpful.

I am not a QI, but I have significant 1031 experience and have interacted with hundreds of QIs in the last few years. My experience - there are a few great firms and many average to below-average experiences. Don't pick based on price, as it's nominally different. 

If you want a direct reference, DM me.