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turnkey deals and that have a lot of moving parts. In addition, very few brokers can find appropriate property options for their investors that fit for a client with very specific requirements for debt replacement parameters.
ENTER THE DELAWARE STATUTORY TRUST SPECIALIST
This is where a Delaware Statutory Trust specialty firm can be of real value to a real estate broker who is representing a multifamily investor who just sold a property. One of the potential advantages of a DST is that it provides beneficial interest in a property that has non-recourse debt that is already “pre- packaged” for a 1031 exchange. Effectively, what that means is that it is relatively simple for the real estate investor to make the 1031 exchange math work – almost down to the penny. Investors also have greater flexibility in putting their investment dollars into multiple DSTs in a variety of real estate combinations and still achieve their desired equity and debt targets.
A hypothetical investor named “Alison T.” needs to replace $200,000 in equity and $100,000 in debt. Now she could put $100,000 into one DST with no debt (an all-cash debt free DST) and the remaining $100,000 into a DST that has a loan on the property at 50% Offering Loan to Value (LTV). Another option would be to put $50,000 into a DST with no debt and $75,000 each into two additional DSTs that both have 40% LTV.
In comparison, an investor conducting an exchange with a single property, such as a rental home, would have to find a property they want to buy at the desired $300,000 price. They would then have
Option One
Invest $100,000 into one all cash DST
to bring their own money to the table for an all- cash purchase or secure a $100,000 mortgage. Effectively, investors are working in a much narrower box with fewer alternatives – all while the clock is winding down on the 180-day timeframe allowed to complete an exchange. Including a DST 1031 property option creates a reliable backup plan for investors like Alison T. in case her original property exchange falls through. That’s why DST specialists are a great resource for real estate brokers because they can help ensure the client has a reliable backup plan ready to go.
Smart brokers who represent investment property owners should always have a relationship with a DST 1031 specialist advisory firm like Kay Properties and Investments. They can present the DST 1031 strategy to their clients as an added benefit that they bring to the table, while also providing an expert resource for creating a back-up 1031 identification tool and creating a safe tactic to avoid a mortgage “boot”. (*Every investor’s tax situation is different, and this article is not tax or legal advice. Investors should inquire with their Certified Public Accountant to verify their 1031 requirements.)
“When brokers are getting close to listing a property, it is important that they contact Kay Properties in an ample amount of time before their client’s deadline. This will give them enough time to understand the risk and business plan of each offering. We are always available for conference calls and or in-person meetings with your clients,” said Dwight Kay, founder and CEO of Kay Properties & Investments.
An Example of How a DST 1031 Exchange Can Replace Both Equity and Debt
1031 Debt & Equity Re- placement Amounts
Need to Replace $100,000 in Debt & Need to Replace $200,000 in Equity
Invest $100,000 into a DST with a loan at 50% Offering Loan to Value
Invest $75,000 into two DSTs that have a 40% LTV each.
$133,000 All-Cash / Debt- Free DST Investment
Option Two
Invest $50,000 into an all-cash DST
Option Three
$67,000 with a 60% LTV
This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/ operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.
Nothing contained in this article constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703. NOTE: Past performance does not guarantee future results and DST investments may result in a complete loss of investor principal. This is an example of the experience of one of our clients and may not be representative of the experience of other clients. These clients were not compensated for their testimonials. Please speak with your attorney and Certified Public Accountant before considering an investment.
CS-18 NOVEMBER 2021 - APARTMENT MANAGEMENT MAGAZINE