All Forum Posts by: Jon Taylor

I've got a great contact. I'll DM you.

@Carlos Ptriawan

RE: Private vs Public REIT. I've seen the same thing. Many private REITs are less volatile due to the fact that they are valued quarterly by private institutions rather than in real-time (with forward projections and assumptions priced in) by the capitalistic marketplace. They are similar, but different products as a result.

RE: DST vs Sole Ownership. Agreed. If you are going to the trouble of acquiring the property, managing the tenants, taking all the debt risk, and executing your own exit, it had better pay you more!

@Amit M.

It would be anecdotal, as there were quite a few smaller TIC offerings in those days. I can say that it was significantly painful for many.

@Amit M. -

I actually do have that data, but not in the format that you are likely expecting.

DSTs were established in 2004 with an IRS ruling, but they weren't commonly used until after the mortgage crisis and ensuing recession. Prior, most syndications were structured as a Tenant In Common (TIC) structure for the 1031 exchange investor.

As a result, many of the active DST players are either reinvented from the ashes of that crisis, or entirely new.

There are some inherent (unanimous voting by all members to make any decisions) reasons why the TIC was replaced by DSTs, but I'll save you the history lesson.

The most useful lesson coming out of the last recession (and I share your perspective on the cyclical pattern coming around the corner ahead) is how different asset classes faired.

You can get that data from public filings from REITs, who have to report far more data and intel than OTC private placement investments.

Fast forward to the COVID crisis. We saw many publicly traded REITs lose value quickly. The market is very quick to act and is constantly pricing the future into today’s asking price. We saw the beginnings of similar asset class corrections to 2008, but no one could have predicted an eviction moratorium and unprecedented actions by the FED to soften the blow.

Ever since the quick rebound, institutions are adding stabilized properties to their assets that have tenants that have weathered previous economic turmoil.

One way the big boy institutions are trying to mitigate risk is by buying properties that performed historically well during challenging economic times.

Because *some* DSTs align with that strategy, it gives you an opportunity to shift some of your investment equity into institutional asset classes that would be out of reach for the retail investor with a modest amount of equity to invest.

Net out: You don’t want to hold a bad property ever, but especially not during a recession inside of any sort of a syndicated structure. It all starts and ends with the properties. A good starting point is to ask yourself the question, ‘if you had to, what would you have bought in 2006 with unlimited funds?’

@Vidit Maini -

Check out this thread as a way to help you ask the right questions as you evaluate the DST market. Hope it's helpful!

https://www.biggerpockets.com/...

@Carlos Ptriawan -

To reply to some of your questions above:

The standard minimum investment into DSTs has been $100k for quite some time, but I've seen sponsors process transactions as low as $40k. 

Each DST program has fee structures that are slightly different. I'm looking at one right now with the following (real, live situation):

3.85% commission, 0% annually (unless you go through an RIA, you shouldn't be paying any fees to participate in a DST along the way; but there are operating expenses that are transparently modeled based on the assets in the Trust), disposition fee of 2% (subordinated to a full return of original investor equity outside of monthly distributions). The program has about 50% debt, so those fees are split half/half between your equity, and the debt on the portfolio.

Regarding track record and performance, I'd look at two things: 1) Did they pay on time, every time, at least the minimum monthly distribution; and 2) Did they return AT least my entire original investment (regardless of upfront fees). If that is your goal (which it should be) then the percentage of DSTs that have met that expectation is far lower than 95%. As has been mentioned, the prior performance of the sponsor is stated in each PPM, so take a hard look at that.

When you are considering fees for any sort of syndication, it's also important to evaluate the alternatives. A traditional sole ownership property will cost you approximately 5% of the total value of the property to sell based on fees we are all used to paying (and you are paying all of that out of your equity, regardless of how much debt is on the property, and without a return of capital clause).

Again, simplify your analysis to a strict understanding of the property level analysis inside the portfolio - something you've likely been doing on your investments to date. But, once you get to the REIT, you need to add a few more sophisticated tools to your toolbelt as you seek to understand the way the REIT operates.

@Lan Bak,

The fees likely aren’t going to be the deal breaker. In my experience, for the right program, a 3% markup is justifiable. 

Sometimes the fees are ridiculous, but that is an outdated argument against syndications, as most brokers & investors are sophisticated enough to avoid a structure that isn’t reasonable.

@Lan Bak,

Me too!

Seems like Zillow tried the same thing and failed. https://www.wsj.com/podcasts/t... Wondering how they are able to do it!?!

@Lan Bak,

Inputs: Section 721 of the Internal Revenue Code allows an investor to exchange property held for investment or business purposes for shares in a Real Estate Investment Trust (REIT) without triggering a taxable event. The transaction allows investors to increase the liquidity and diversification of their real estate investments while deferring costly capital gains and depreciation recapture taxes that may result from the sale of a property.

Benefits: 

REITs also can provide the same ongoing benefits of real estate ownership including income, depreciation tax shelter, principal pay down, and appreciation. Many REITs continue to make acquisitions on an ongoing basis. This allows the investor to benefit from future buying opportunities in the REIT without triggering any capital gains or depreciation recapture tax events. *Please note: As Dave mentioned, not all REITs allow for ongoing depreciation, but some do. It's important to understand the difference, and I'd recommend sticking with the REIT with depreciation advantages.

The Tax Cut and Jobs Act (TCJA) includes a 199A deduction and applies to certain income from pass-through entities (including REIT dividends) and allows individuals to take the 20% deduction against REIT dividend distributions that yields an effective tax rate of 29.6% or 37% (80% for upper bracket filers). But the 199A is scheduled to sunset in 2025 under the TCJA unless made permanent.

It wouldn't be uncommon for some investors to only realize taxable income on 40-50% of their dividend distributions in today's current environment (I have seen this personally).

You asked about fees, so one quick comment. Often times the transaction between the DST and the REIT involve a significantly lower commission for the brokers. As such, many aren't incentivized to advise you along that path (sad but true). Instead, the commission is passed along to the investor in the form of increased equity.

Most of the time, the REIT has liquidity as an option. This is great of your accountant who may choose to advise that you liquidate shares during a tax year where you realize some loss elsewhere. It's also a great way to pass buildings down to your kids who want nothing to do with the active management business. Instead of saddling them with a $5M commercial property (for instance), you can turn that into 166k shares and divide them amongst your kids (who are in line to get a full step-up in basis when you pass away).

Gotchas: 

The UPREIT is sometimes an option, and sometimes a mandate. It's really important to understand the difference. There are examples of DSTs that included an exit into a REIT that DID NOT ALLOW the investor to do a 1031 exchange. The investor was unaware of this previously. Horrible.

The REIT is essentially a "blind pool" investment. The Trustee of the REIT can buy and sell properties within the REIT without triggering a capital gain event to you as the investor, however, this flexibility also allows the operators to potentially add properties to your investment portfolio that may expose you to risks or asset classes you were previously unaware of.

There are a couple of sponsors I am aware of that carve individual properties out of the REIT, into a DST, then pull them back into the REIT at a significant mark-up to the DST investor. This is important to understand on the front end when you are investing in the DST.

Summary:

If you are making an investment into a DST with a REIT exit, you are aligning yourself with the sponsor in a long-term way. It's more important than ever to understand what you are getting yourself into. I'd encourage you to evaluate the REIT first, then the DST second. And in some ways, the DST becomes less (*slightly less*) important in that scenario. It's a gateway into the investment you actually want to make.

I'd recommend you put yourself in a position to take advantage of a REIT exit as an OPTION, not an OBLIGATION. Test the waters with the sponsor for 3-5 years as they hold the properties in the DST, then decide if you want to align with them as a part of your long estate plan.

Last (and best) recommendation: Ask your broker what the funds from operations (FFO) ratio is. All REITs are required to show their FFO calculations on their public financial statements. The FFO figure is typically disclosed in the footnotes for the income statement. If the FOO ratio is less than 100%, hard pass. That means they are paying dividends out of investor capital or debt, instead of NOI. That easy question to answer will be a really great litmus test in your due diligence toolbox.

If you are evaluating a REIT, it would be wise and prudent to do your homework and select the appropriate professional to guide you. It can be a wonderful tool.

@Russell Sherman -

I agree wholeheartedly with Dave.

You need an expert in each area, not a Swiss Army knife. The QI/broker combo is not a normal situation (for the reason Dave mentioned).

To answer your broker vs RIA question…

The major difference is scope of potential services and compensation structure.

An RIA is structured to actively manage money, and as such, they get paid a percentage of AUM (assets under management). They are expected to constantly monitor markets on your behalf and act quickly. They most commonly trade equities.

The broker is structured to have a unique and deep knowledge a smaller or more specific market or solution - great example is your realtor who is helping you sell your property. As such, they get paid only when a successful transaction is completed.

Because DSTs require a deep real estate expertise FIRST, it is most common to see them represented by the brokers. It’s also a completely passive and illiquid investment, so it’s tough to justify the 1% fee every year… forever.

Mineral rights is over my head, so no comment there - other than to say, I have familiarity with most of the DST brokers, and they have a hard enough time keeping track of just the DST revolving door of 2-5 new products weekly. I can't imagine there is a broker who can do both well.

One more note about DSTs… they tend to fill up with “indications of interest” weeks before they are released to the retail market. You’ll want to work with a broker who has an idea of historical and current deals, but most importantly and I deal of what’s upcoming that may have room for you. If you haven’t closed on your sale yet, you will most likely invest in something that is not yet reviewable by the retail market quite yet.

Lots of pieces, and a short timeline. I feel for you. But it’s totally doable.