From our industry experience, real estate investors have enjoyed not only a strong economy the past several years, but also a healthy increase in property values in many areas of the country. We believe the market has been very kind to many who own real estate for business investment purposes.
For investors who are considering cashing in while valuations remain high and looking to reinvest, the advisor’s “circle of experts” who are typically engaged in DST transactions – Real Estate Attorneys, CPAs and Qualified Intermediaries (QIs) – play a vital role in educating their clients on the many potential benefits a DST offers, including:
The Passive Option
Most individuals who own real estate property for business purposes, know, all too well, that managing a property can often be burdensome, if not downright overwhelming. When an owner considers a sale and is looking to reinvest in other real estate, if suitable, DSTs offer a unique opportunity to leave all those management headaches behind. As a passive investment, this is perhaps one of the most appealing benefits the circle of experts can inform clients of.
Another key benefit that investors should be made aware of is that a DST can be used as a backstop when they’ve identified a DST or DSTs within their 45-day window, and if one of their properties they originally intended on exchanging into falls through due to some unforeseen circumstance.
Avoiding BOOT Issues
Another important aspect of DSTs that attorneys, CPAs and QIs should help clients and prospective investors understand is how the DST structure can help avoid Boot issues. For example, if suitable, a DST can be a great solution for an active investor who has found replacement properties but has monies left over that need to be placed in order to complete their exchange. Due to relatively low minimum investment requirements, a DST can easily fill a boot issue.
Also, Investors with previous debt on a relinquished property must replace the equal or a greater amount of debt on the new replacement property. Lenders are cautious with underwriting, Loan to Value (LTV) personal guarantees, appraisals and so on. With a DST, the debt is non-recourse to the investor and there is no individual underwriting. The investor can enjoy the potential benefits of the debt but not the personal liability, due to the DST’s trust structure.
Additional DST benefits to help inform clients of include:
Today, many investors are finding it challenging to find replacement properties due to cap rate compressions in major markets. Using a diversified portfolio of DST investments can potentially reduce the concentration risk often inherent to a single asset property. In addition, the minimum investment in a DST is generally a more palatable $100,000.
Investors may have properties that were lower quality, deferred maintenance, poor management, fully depreciated and/or lower returns on today’s equity. Most DST investments are larger, institutional quality properties with long-term leases and higher occupancy rates. In addition, the size, value and quality of the DST along with the size of the sponsor itself could potentially offer lower loan interest rates from major banks, lenders and agencies.
Efficient Replacement Solution
If an investor decides to move forward with a DST portfolio, Fortitude can generally close the investor’s replacement properties in a quick and efficient manner, typically within a week. This particularly applies to those investors managing their own exchange, especially if they have debt to replace that could potentially draw out closings for as long as six months from the date of sale. A speedy and effective closing can save an investor from a significant amount of lost income.*
When it comes to estate planning, DST investors – and their heirs – can essentially “swap till they drop.” When the DST owner eventually passes away, his heirs will receive a step-up in cost basis. Due to the passive nature of a DST’s structure, the heirs have no responsibilities. The DST can allow many extended members of one family to receive an interest in the same investment, helping to avoid the conflicts that often arise as an estate is settled.
As with any real estate opportunity, investors must be diligent when evaluating a DST, and sometimes the rules, and even the potential benefits surrounding a DST investment, can be confusing. That’s why the roles of the Attorney, CPA and Qualified Intermediary are so importing in helping clients make sound, informed decisions. The DST benefits we’ve highlighted here will help you continue to be that valued and essential expert.
If you have any questions, please feel to contact our team.
In the meantime, feel free to browse our full list of replacement properties here.
*Lost income from the lengthy process of a traditional real estate closing which could take a long as 180 days to complete (especially if the exchanger is looking for financing to cover preexisting debt on his relinquished property) from the initial sale date of the investors relinquished property to the closing of the new replacement property or properties. A 1031 exchange into a DST investment, where the client is ready to place funds into one or more DST investments the day the funds are placed with a Qualified Intermediary could potentially close in about a week from when the Qualified Intermediary receives funds from the investors relinquished property and the investor would potentially start receiving their pro rata income for the first month they are invested in the DST investment(s).