“The exchange is never the hard part. The hard part is deciding what you want on the other side of the sale, and almost nobody gets to think about that clearly with 45 days on the clock. That is the work Fortitude is actually hired to do.”
- Daniel P. Raupp, Co-Founder and Managing Partner, Fortitude Investment Group LLC
Client Case Study
The short answer
A family in the southeast sold eight self storage facilities in a $140 million transaction that included $50 million of existing debt, then completed a 1031 exchange into a diversified portfolio of Delaware Statutory Trust interests. The nonrecourse financing inside the DSTs satisfied their debt replacement requirement without any personal guarantee, the fractional interests were divisible among four children for estate planning, and the capital gain and depreciation recapture were deferred rather than paid at closing.
*This is a hypothetical scenario based off of the firm's experience and previous exchange transactions of this size and scope. Due to the privacy of our clients, we are reluctant to share specific details and general details have been changed to protect client confidentiality.
They had four adult children and no successor. The business worked. The succession plan did not.
The family spent close to three decades building the portfolio. Eight facilities across the southeast, real cash flow, roughly $50 million of debt, and four adult children, none of whom wanted to run it. The choice was not whether to exit. It was whether to exit on their terms or on a buyer's.
They called us before they listed anything. That timing is the entire story. Most owners reach us after a contract is signed and the clock is already running, and by then the options are whatever can be made to fit inside 45 days. This family gave us room to work.
Run two tracks at once. Take the portfolio to institutional sponsors for a direct read on value, and work the open market in parallel. The sponsor conversations establish a real floor and give you underwriting you can hold buyers against.
We took the portfolio to two DST sponsors active in self storage to test both a straight acquisition and a structure where the family could stay in the asset class without staying in the business. At the same time we worked the open market.
The sponsor conversations did exactly what they were supposed to do. They produced institutional underwriting and a defensible floor. In the end the open market produced the stronger buyer. Total transaction value was $140 million, including the $50 million of existing debt.
Yes. Under Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as a direct interest in real property, so it qualifies as replacement property in a 1031 exchange regardless of what property type you sold.
The family exchanged out of eight operating storage facilities and into a diversified portfolio of DST interests across multiple sponsors and multiple property types. Like-kind does not mean same kind. It means real property held for investment, which gave them the ability to trade concentration in one asset class for diversification across several.
DST investments are available only to accredited investors and are illiquid. That is a real constraint and it belongs in the conversation early, not at the end.
DST offerings are typically acquired with nonrecourse financing held at the trust level. Your proportionate share of that debt counts toward the debt replacement requirement in the exchange. You do not sign a guarantee and you do not qualify with the lender individually.
This family had to replace $50 million of debt to avoid mortgage boot. The DST positions handled it structurally. No new loan application, no financial statements to a new lender, no signature page.
“After thirty years of personally guaranteeing storage debt, not signing another guarantee was worth more to that family than any single line on the closing statement.”
- Daniel P. Raupp, Fortitude Investment Group
Yes. DST beneficial interests are fractional and divisible, so a portfolio can be allocated among multiple heirs in defined shares. A single operating building cannot be split four ways without forcing a sale or a shared ownership arrangement among heirs who may not agree.
You cannot divide eight buildings four ways without someone eventually suing someone. You can divide fractional interests. We built the replacement portfolio so each child's share could be identified and allocated cleanly, which is what their estate attorney had been asking for long before we got involved.
No. It defers it. Depreciation recapture and capital gain both carry forward into the replacement property. Under current law, positions still held at death receive a step-up in cost basis for heirs, which is how a deferred liability can ultimately be resolved for the next generation.
Thirty years of depreciation on eight buildings creates a recapture number that stuns most owners the first time they see it in writing. The exchange deferred that liability instead of triggering it at closing. The replacement properties also generate their own depreciation, which shelters a portion of the income the family receives going forward.
“Anyone telling you an exchange makes the tax disappear is selling you something. It defers. What you do with the deferral over the next twenty years is where the real planning happens.”
- Daniel P. Raupp, Fortitude Investment Group
Roughly eighteen months from the first conversation to the last closing, with the structural decisions made in the first six of them and the 45-day clock never becoming the binding constraint.
The sequence below is what a planned exit looks like when the owner is not racing an identification deadline. Details have been generalized.
| Stage | What happened | Why the timing mattered |
|---|---|---|
| First conversation | Family called before engaging a broker or signing a listing agreement | Every structural option was still available, including the entity and consent work that has to precede a contract |
| Structure and entity work | Ownership, partnership consents and the four-way allocation framework resolved in advance | Partnership divergence and entity cleanup are the two issues that most often kill an exchange during escrow |
| Two-track marketing | Institutional DST sponsors approached in parallel with the open market | Sponsor underwriting produced a defensible floor before any buyer made an offer |
| Sale | $140 million total transaction value, including $50 million of assumed or repaid debt | Debt replacement requirement was known and solved for well before closing |
| Identification | Replacement DST interests across multiple sponsors and sectors | Diligence had been underway during marketing, so the 45-day window was confirmation rather than discovery |
| Closing and allocation | Positions allocated so each of four children's shares could be identified cleanly | The estate attorney's requirement was designed into the replacement portfolio rather than retrofitted |
Nobody in that family had to become an expert in anything. They are now out of the storage business. No tenants, no roofs, no midnight calls, no capital decisions on a facility in a town none of them live in. They receive statements and distributions.
We coordinate the entire structure, not just the product. Sponsor introductions, qualified intermediary coordination, sponsor and property-level due diligence, debt replacement math, and allocation modeling across the family branches, with one point of contact from first call to last closing.
Twelve to twenty-four months before a sale where possible. Once a property closes, you have 45 days to identify and 180 days to close. Structure, debt replacement, entity cleanup and partnership consent are all far easier to resolve before a contract exists.
The mechanics of an exchange are learnable. The hard part is deciding what you actually want on the other side of a sale, and almost nobody thinks about that clearly with 45 days on the clock and a buyer calling every morning.
“Discipline over deferral. Structure first, then the deal.”
- Daniel P. Raupp, Fortitude Investment Group
If you own investment property and a sale is anywhere on your horizon in the next 24 months, the conversation worth having today is not about price. It is about what happens the day after you close. Reach out. That first conversation costs you nothing and it is usually the most valuable hour in the entire process.
Yes. Under Revenue Ruling 2004-86 a beneficial interest in a properly structured Delaware Statutory Trust is treated as a direct interest in real property and qualifies as replacement property in a 1031 exchange regardless of the property type you sold. DST investments are available only to accredited investors.
Most DST offerings carry nonrecourse financing at the trust level, and your proportionate share counts toward the debt replacement requirement. You do not sign a personal guarantee and you do not qualify with the lender individually.
No. It defers both recapture and capital gain into the replacement property. Under current law, positions still held at death receive a step-up in cost basis for heirs.
Yes. Beneficial interests are fractional and divisible, so a portfolio can be allocated among heirs or entities in defined shares without forcing a sale or a shared ownership arrangement.
Twelve to twenty-four months before a sale where possible. After closing you have 45 days to identify replacement property and 180 days to complete the exchange.
Yes. Because DST minimums are typically far below the value of a whole property, exchange proceeds can be allocated across multiple sponsors, property sectors and geographies rather than concentrated in a single replacement asset. Sponsor diligence should be run separately on each.
Free eBook
What to read in an offering before you read the projected distribution: sponsor track record, debt terms, reserves, fee load, and the structural questions that separate a sound placement from a marketed one.
Download the eBookDaniel P. Raupp is Co-Founder and Managing Partner of Fortitude Investment Group LLC. He holds FINRA Series 7, 24 and 63 registrations and has spent more than 25 years structuring 1031 exchanges and alternative investments for property owners nationwide. Setauket, New York. 1031DST.com.
Details of this transaction have been generalized to protect client confidentiality. This describes one client's circumstances and one client's outcome. It is not a prediction, a projection, or a guarantee of results for any other investor, and it is not a recommendation to buy or sell any security. Every exchange is different and results depend on facts specific to the taxpayer.
Delaware Statutory Trust investments are illiquid, involve risk including the possible loss of principal, depend on the sponsor as operator, and are available only to accredited investors. There is no guarantee of distributions, of income, or of appreciation. A 1031 exchange defers taxes. It does not eliminate them. Depreciation recapture and capital gains liabilities carry forward into the replacement property. Nothing in this article is tax or legal advice. Consult your own CPA and attorney regarding your specific situation.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Fortitude Investment Group is independent of CIS and CAM.
This material is for informational purposes only and is not an offer to buy or sell any security or investment product. Past performance does not guarantee future results. All investments involve risk, including possible loss of principal. Consult your tax, legal, and financial advisors before making investment decisions.