Selecting potential DST investments is an interesting part of the process. The DST property may include multi-family units of two or three hundred units, or it could be healthcare-related office buildings, self-storage facilities, or triple net long term corporate leases like a Walgreens or a Napa Auto Parts or any number of companies. [In case the term is unfamiliar, a triple net lease is a lease in which the lessee pays rent to the lessor, as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.]
I am always fascinated to listen to the Sponsor’s DST acquisitions team talk about their acquisition criteria and how it is implemented. With more advanced technology and highly sophisticated and functional databases, competition for the most appropriate properties is keen and a proven Sponsor is important.
One thing I like to keep in mind when it comes to technology and the various market segments is the “Amazon Effect” as it is called. This relates to the fact that more consumers are purchasing items online and fewer are going to the “bricks and mortar” physical locations to purchase items. This has had a dramatic effect on the commercial real estate sector, especially retail. However, some market segments seem immune to it, such as the housing market (people need a place to live) and the grocery store/convenience store market. Most investors, including the major DST Sponsors are aware of this and favor those sectors not so affected. As a DST advisor I stay on top of what property types are being offered and what the national real estate market trends are. Although difficult to predict, we still need to do the best we can to try to forecast what the future may hold relative to any particular real estate market segment.
Corporate entities that offer or sponsor DSTs are reviewed by me prior to my recommending any of their offerings. Part of my due diligence is to review information on the offering entities (Sponsors), making sure that their performance history, property selection process and quality of properties offered measures up to the high standards that I demand for my clients. That criteria includes review of their financial disclosures, making sure that they are well-capitalized, review of their business credit rating which typically reflects their level of integrity, and performing telephone interviews with key personal confirming what the available data indicated. At or about the time of placement (where one of my clients will be placing their funds into a DST share) I will have been carefully monitoring the equity available in the particular DSTs. Awareness as to the availability of a particular DST and the escrow target close dates are two of the most key components to ensure a successful completion of the 1031 DST exchange.
Since I focus entirely on DSTs, and do so in a financial advisor capacity, I can avoid common mistakes often made. For instance, every few months I walk into a situation where a well-meaning financial advisor will have stated to a client enthusiastically, “Sure I can do DSTs.” They may be duly licensed to do so, but de facto unqualified! They don’t realize the time commitment and responsibilities involved in helping an investor transition from an income property owner and manager to a DST investor! On virtually every deal that I am involved with, I try to be as pro-active as possible doing what I can to make sure that no detail is overlooked, that nothing is missed, and that all of the moving parts work together smoothly and effectively to the successful completion of the transaction. It may seem unnecessary, but on the contrary, it often times proves to be key in getting the job done for the investors I work with. Often that includes assuring the various parties that things are going as planned. That can include staying in touch with escrow officers (on the sale of the relinquished/traded property), the real estate agents involved, the investor and even the title company. On the DST side of things, gentle reminders and regular updates keeps them and their team at the ready. That includes the DST Sponsors themselves, their title company and the 1031 Exchanger handling the transfer of funds to close the deal. It can be pretty exciting watching all the pieces come together and making the call to the investor letting them know that they are now invested in a DST. It is one of my favorite calls to make!
A point that I would like to stress is that on the surface it may seem fairly straight forward, completing a 1031 Exchange into a DST interest, but it really is not. For instance, occasionally I get a call from someone working with another financial advisor trying to put a DST exchange together and they will tell me that it didn’t go so well. Problems may have come up that were not properly addressed in advance. The DST targeted may have sold out. There may have been a delay in the closing of the relinquished property and the available options changed. The investor/seller at the last minute may have chosen a different allocation of proceeds, affecting the planned DST exchange to where it was no longer doable. Those kinds of things can happen, and even more. It is so important to be working with someone who’s primary business focus is helping investors invest in Delaware Statutory Trusts. When you do this full time like I do, then the things required to provide the best service to your clients are the things that you do every day. Which is exactly what I love to do. Be sure that you find a specialist to work with in this field. We are living in the age of specialization and working with a specialist is always the best way to go.
*** DST investments are illiquid, highly speculative and like all real estate, may involve substantial risks. DST owners do not maintain control over management decisions and are subject to additional IRS regulations. Potential tax benefits must be weighed against the costs and fees associated with a DST investment and its management.
By Don Meredith, President of Tactical Income Inc.
Author of The DST Revolution –1031 Exchange into retirement mode. 2nd Edition
Contact Don Meredith of Tactical Income, to learn more about Delaware Statutory Trusts (DSTs) and 1031 Exchanges at: don@lightpathcapital.com or (619) 726-6100.
Securities through LightPath Capital, Inc., Member FINRA/SiPC, 1560 E. Southlake Blvd., Suite 100 Southlake, TX 76092 925-899-1709 Direct 214-734-2957 Office