All Forum Posts by: Jon Taylor

Russ - The objective of this forum is purely education, but if you'd like to send me a direct message, I can provide additional information. 

@Russ Olivier,

You are asking the right question, and like any real estate deal, due diligence is massively important. The challenge you'll face is that, even though this is fundamentally real estate, you're moving from the SFH retail world to evaluating institutional assets within asset classes that are likely less familiar.

The first thing you'll notice is that the sponsors (who are the Trustees of the trust and could also be thought of as the general partner of the deal) will issue a PPM (private placement memorandum) that is a 300-500 page document. This document is everything that is necessary to issue the deal. A worthwhile investment isn’t just one with attractive cash flow projections; it must also base those projections on sound underwriting assumptions. Those assumptions are all documented within the PPM.

Information from the sponsor is important but should serve as the starting point. You'll want to collect research that goes far beyond the documents and reports provided by the sponsor.

I'd work my way down this list when looking at the buildings: 

Specific to the properties: Acquisition Costs, Environmental Reports, Appraisals, Property Condition Reports, Inspections

Because these are likely commercial properties, much of the value is connected to the tenant, so evaluating the tenant becomes crucial: Conditions of Leases (duration, escalations, extensions), Balance Sheets, Competitors, Historical Performances, Credit Scores, Macro Trends

Local market factors that you are used to pulling: population density, population growth, unit type inventory and growth (multifamily), median income, etc...

Financing terms: interest rate, principle paydown plan, cash sweep options...

Offering model: management plan, operations, asset management, exit strategy.

Sponsor track record: Every sponsor has a list of the previous offerings within the PPM. Although the past won't predict the future, it's important to understand their expertise and previous success. 

There are financial services firms that focus on real estate backed securities as a significant part of their practice. I'd try to parse out the sales people from the analysts with a simple question, "Can you show me an example of a DST that your firm is choosing not to sell, based on your evaluation of the underwriting? And can you walk me through that offering in great detail?"

The ability to exchange real property, held for investment, for real property, held for investment without triggering a taxable event. See below for some basics. I've attached a link that can help you as well.

1) The taxpayer needs to stay the same on the replacement property as the relinquished

2) You need to replace the total net value of what was sold

3) You need to spend all of the equity (net proceeds) that was generated by the sale

4) You have 45 days to ID - there are 3 different rules you may choose to use (see link below)

5) You have an additional 135 days to close on what you ID'd

6) You need to hold the funds with a QI

https://www.investopedia.com/f...

@Sarah Thornton,

As a rule, the only way to extend your 45 days is on the front end! Some strategies include a seller option to close within a date range, allowing you to have an extension on the front end, and close very quickly. Another idea is to start the identification process now! There is no rule that you can't put a property under contract prior to the close of your relinquished property. The 45 days is not flexible (which is why you can identify three addresses and only close on one.

If you begin the 1031 process with your intermediary, you will not be refunded your QI fee, and you'll tie your money up for a minimum of 45 days (and in many cases for up to 180 days). 

@Steven Barr

Back of the napkin here (without calculating net sales price): You've sold $1M worth of property, and you're trying to acquire $600k. In your scenario, you'd defer approx 60% of your tax liability. You'd need to spend all of your equity net proceeds ($200k), and buy at least $1M to defer everything.

@Eric D. / @Glen Z. / @Isaac S. - 

This thread does a nice job of talking about DSTs at a high level. I'll add just a couple things: 

1) You should only invest in a fraction ownership investment if you would be happy owning the property (or properties) that are being syndicated in the Trust - at the price (including all fees) that they are offering. Just like the majority of the traditional sole-ownerhsip market, you'll likely look at some properties and decide they aren't for you, for a variety of reasons. Don't blindly accept the entire market as suitable for you, and don't blindly decide every DST is terrible sight unseen.

2) You really do need to identify a wealth management office, RIA, or financial planner with a deep understanding of real estate and comprehensive access and understanding to both current and upcoming DST portfolios. It's not uncommon for the highest quality DST programs to sell out within 2 weeks of it hitting the market - so an understanding of what is *going* to be available in 30/60/90 days is incredibly helpful.

3) There are commissions involved in DSTs. These should be understood and clarified on the "estimated use of proceeds" page of the PPM. Your rep should present this page to you immediately. 

4) You need to understand that DSTs are a retail investor's opportunity to invest in an institutional product. Valuations, cash-flows, business models, etc, are going to be different than you're used to, not because it's a bad deal, but because it's underwritten differently than many real estate acquisitions that many of us are used to evaluating.

It's worthy of strong consideration, but it's a purpose-built tool for a very small subset of the retail investor community. Good luck!

@Carlos Ptriawan - 

FYI, the Zero Coupon DSTs are few and far between these days. The type of mortgages that used to be available are becoming harder to get from banks, but they are out there.

The fees should be crystal clear, without question. Your broker should walk you through each line item with absolute clarity, as it's in the PPM. The fees won't be the reason you choose not to invest. They are competitively priced and are built for investor equity. 

@Ana Vhan,

As @Dave Foster mentioned, there are many who can sell DSTs, but it takes expertise to truly understand the Real Estate investments that underwrite each Trust investment. Here are a few tips:

In regards to evaluating DSTs, each asset class needs to be evaluated with an understanding of the technical fundamentals that matter, AS IF you were purchasing those properties outright.

You need to understand the answers to questions like:

Were the properties purchased at the right price?

Are the properties being marked up before they are sold to investors.

How is the cash-on-cash being modeled - what is variable, and what is fixed (income and expenses)?

What are the assumptions that are being factored in - namely occupancy rate and rent per square foot per unit type - and how do they compare to the local market?

What are the terms of the debt?

What are the demographics of the area? (Population in the 5-mile, population growth, etc…)

What's the exit strategy?

I generally stay up to date on the current DST market, and there are a few that are currently attractive enough to invest money in. A lot has changed since the fed started to raise rates. And a lot changed since the COVID crisis. Some are great. Many are not… (IMO)

Proceed with caution, but know that there are some investments out there that I believe will meet the underwriting expectations. 

@Dan Kerch,

A couple of things about DSTs to be aware of:

1. In response to, "I will be conducting a 1031 exchange in the next 6 weeks or so but have been told about Delaware Statutory Trust. I have done some research but would like to hear personal experiences with them." Check out this thread and perhaps reach out to individuals, individually. Or, post again and it will alert those of us who have participated previously. https://www.biggerpockets.com/...

2. In response to "Ideally I would like to have more than 45 days to make a decision on a property especially in today's market." DSTs can be tricky to fund in coordination with the 1031 window because the Sponsors are taking investor equity on a first-come-first-serve basis. It becomes VERY risky to ID (beyond 45 days) a DST, as the quality programs are in demand and are sold out quickly (within 30 days). There is no assurity that what you've ID'd will still be available if you delay the closing process.

3. In response to, "From the sounds of it you have to have your investment in the DST for a particular amount of time." Every DST has to document the exit intent in the memorandum. It seems that 5-7 years is common. The sale will be initiated by the Sponsor, and all beneficial interest owners of the Trust simultaneously have their liquidity event when the Sponsor chooses to sell. You are illiquid until that even occurs. So, it may not be the best tool to "time the market."

In my opinion, you should invest in a DST because it is your plan A, it meets your need, and it's a property (or portfolio of properties) that you are happy to own.