DST 1031 PROPERTIES: THE BASICS
By Dwight Kay
A Delaware Statutory Trust (DST) is an entity that is used to hold title to investment real estate. In some ways, this is similar to how a Limited Liability Company (LLC) can hold title to real estate; however, unlike an LLC, a DST 1031 property will qualify as “like kind” exchange replacement property for a 1031 exchange. This qualification as “like kind” property is pursuant to Revenue Ruling 2004-86.
The DST entity can be used to hold title to most types of real estate; however, a typical DST 1031 property is a triple net (NNN) leased retail or office property or a multifamily apartment community. A NNN leased property is a property whereby the tenant (and not the landlord) is typically responsible for property maintenance costs, insurance premiums and property taxes.
Other types of DST 1031 properties that have been available to investors have included shopping centers, government leased buildings, self-storage facilities, senior living communities, warehouses, distribution facilities, medical office buildings, fast food buildings, pharmacies and grocery stores.
Typically, at any given time, Kay Properties has 10 to 15 DST 1031 properties available to our qualified accredited clients, with a typical minimum investment of $100,000.
The following are examples of past DST 1031 properties, and actual properties, tenants, lease terms and financing structures may vary greatly. Please note that the names listed below are independent of Kay Properties and Investments and belong to their respective copyright and trademarked companies. Please also note that there are material risks associated with investing in real estate and DST properties, including but not limited to loss of entire principal amount invested. Please review the risk section of the private placement memorandum for any potential DST offering that you are considering, and speak with your CPA and attorney prior to investing.
- A 300 unit multifamily apartment community in Jacksonville, FL.
- A portfolio of two medical office buildings on long term net leases in Richmond, VA.
- A 100% occupied single tenant, technology and data center in Atlanta, GA. This was an all-cash/debt-free DST offering.
- A 100% occupied Absolute Triple Net leased building to a global public company in Charlotte, NC.
- A 300 unit multifamily apartment community in Nashville, TN.
- A 100% occupied medical pediatric office property in Raleigh, NC.
- A 100% occupied medical office surgery center in Dallas, TX.
- A 300 unit multifamily apartment community in Austin, TX.
A 100% occupied industrial building on a long term NNN lease in Chesapeake, VA. This was an all-cash/debt-free DST offering. - A 100% occupied industrial building on a long term NNN lease in Chesapeake, VA. This was an all-cash/debt-free DST offering.
DST 1031 properties also have various financing ratios to satisfy an investor’s exchange requirements of taking on “equal or greater debt,” as defined by the Internal Revenue Code Section 1031. However, some DST 1031 properties are offered allcash, debt-free in order to mitigate the risk of using financing when purchasing real estate.
The financing used on DST 1031 properties is typically non-recourse to the investor. Non-recourse financing is typically defined as financing whereby the lender’s only remedy in the case of a default is the subject property itself. The lender is not able to pursue the investor’s other assets beyond the subject property. So, investors could lose their entire principal amount invested in the property in the case of a major tenant bankruptcy, market- wide recession or depression, but their other assets would be protected from a lender.
The non-recourse financing used on DST 1031 properties is typically long- term (usually seven
to 20 years) and already locked and in place with the lender. This can greatly help to reduce 1031 exchange closing risk for investors that must be able to identify a property within their 45-day identification period that they know that are going to be able to close on.
From our observations at Kay Properties, the typical loan to cost of a DST 1031 property ranges between 40-65 percent as of 2017. A DST 1031 property with a 50 percent loan to cost is a property wherein the investors are putting down half of the required equity or
cash amount to purchase the DST property and the lender is providing the other half, in the form of a mortgage.
As an owner of the DST 1031 property, you are typically entitled to receive 100 percent of your pro-rata portion of any potential principal pay-down from the loan on the property, thereby potentially building equity in the property. It is important to note that some DST 1031 properties are structured with principal pay-down beginning the first year, others with principal
pay-down beginning in year two to five and others that are interest-only financing for the life of the loan.
DST 1031 properties are structured whereby the investors in the DST receive 100 percent of their pro-rata portion of the potential rental income generated by the property’s tenants. DST investors receive 100 percent of their prorate portion of any potential net appreciation of the property over the hold period. This is an area that truly differentiates DST 1031 properties from partnerships. With a partnership, the offering’s sponsor is typically entitled to a portion of the potential rental income and potential appreciation.
Investors are keenly interested in the fact that when a DST 1031 property is sold, they are free to do another future 1031 exchange into any type of “like kind” replacement property. Typically, our clients at Kay Properties and Investments do further 1031 exchanges into more
DST 1031 properties; however, you are free to invest in any other typeof “like kind” property that you choose to upon the sale of your DST property.
It is important to note that cash flow from real estate and DST 1031 properties, as well as past
performance, is not guaranteed, as it is a function of the underlying real estate and tenants and
their economic performance. Just as with all other types of real estate, projected cash flows could be lower than anticipated. It is very important for you as an investor to believe in the property, its location and its tenants before investing, as well as to review the risk factors of the offering materials in their entirety.
With DST 1031 properties investors are able to utilize depreciation and interest write-offs to partially shelter their projected cash flow from taxes. This allows for tax-advantaged potential rental income to the investor. This is another reason why many of our clients have invested non-1031 exchange discretionary funds into DST 1031 properties.
A typical DST 1031 property can be closed on within five business days after submitting subscription documents. DST 1031 properties can be closed on this quickly because typically all of the appraisals, environmental reports, property condition reports, financing, tenant estoppels, etc. have already been completed, as DST 1031 properties are “pre-packaged” for 1031 exchange investors. This is one of the reasons why DST 1031 properties have become very popular with investors that are in their 45-day identification period and close to running the
risk of a failed 1031 exchange and a major tax consequence. They like the fact that they can close on DST 1031 properties quickly and complete their 1031 exchange within IRS guidelines.
DST 1031 investors do not receive a K-1 or 1099 at the end of the year for tax purposes. At the end of the year you will receive an operating statement (sometimes referred to as a substitute 1099). This will show your pro-rata portion of the DST properties rental income and expenses.
You will then provide this to your CPA, who will take this information and input it into Schedule E on your tax return, the same as all of your other commercial and rental properties.
DST 1031 properties are only available to accredited investors. An accredited investor (1) is generally defined as an investor with a net worth (assets minus liabilities) of greater than $1 million, exclusive of primary residence. That being said, there are a number of ways that an entity can potentially qualify as an accredited investor, and we encourage all investors to speak with their CPA and attorney before considering a DST 1031 investment to fully ascertain if you and your investment entity (trust, partnership, LLC, etc.) qualify as an accredited investor.
There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family 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. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.
Diversification does not guarantee returns and does not protect against loss. 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 be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. All photos are representative of the types of properties that Kay Properties has worked with in the past. Investors will not be purchasing an interest in any of the properties depicted unless otherwise noted.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA / SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.
DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.