• Johannes Ernharth AIFA®

The Importance of Due Diligence with Delaware Statutory Trust

There are a variety of sources available for passive investments that are eligible as replacement-property for 1031 Exchanges. Not all have the advantage of professional due-diligence screening or a broader array of options that may benefit potential investors.



Delaware Statutory Trusts (DSTs) can be suitable as a helpful solution for 1031 Exchange replacement property, providing the potential for passive income and diversification among professionally managed, institutional-caliber real estate projects. But as individual securities, their quality can vary dramatically from project-to-project and sponsor-to-sponsor.


DSTs are complex real estate securities. Normally they are reserved for accredited investors. Each has a different real estate risk profile as diverse as the many ways real estate projects may be conceived. But when evaluating DSTs, you’re not just facing the inherent complexity of assessing the quality of specific investment properties, their different geographic markets, or sub-sectors. They are also ongoing business operations with management teams of varying experience. They each have particular business plans that can substantially differ in quality. They are generally considered to be illiquid, high-risk, long-term investments.


Suffice it to say, as an asset class, DSTs are not suitable just because an investor “likes real estate”, “needs a 1031 exchange tax deferral”, or is “accredited” and eligible to purchase them. Even when DSTs generally appear to be a good match, sorting through to assess what’s available among DSTs of varying quality is still important. So too, then, is having a prudent due diligence process that reviews them at a deeper level beyond what’s familiar to most non-institutional real estate investors.

Moreover, DSTs are not open-ended investments. They have investor capacity limits. When a new issue fills, it closes to new investors and continues on its life cycle.


A good DST business partner will, therefore, maintain a fully operating due diligence department that’s dedicated to constantly evaluating DSTs as they come to market. They’ll keep track of potential availability and capacity for new investment in order to maintain an orderly, ready and viable listing of prospective DST properties. This will likely increase the odds they’ll have something of the quality and exchangers want when they need it, ready to go.


Qualities to Consider for Being Prepared


Finding DSTs that are suitable candidates for an Exchange situation means finding DSTs that are optimally:


  • In the right real estate sector: DSTs real estate holdings are as varied as investment real estate itself.

  • In a market you find attractive: DST holdings can be in any market across the U.S.

  • Have reasonable, transparent cost structures: This varies by sponsor and project and should be understood in context of industry standards.

  • Using leverage that meets your needs or risk profile: DST leverage can serve different needs and purposes, but is it needed? You should have options!

  • Have realistic business plans and targets: Many projects and related cash flow projections may be arguably unattractive.

  • Have an experienced management team with a track record: Nothing is ever guaranteed, but a record through both good and bad times may be a helpful factor.

  • Are open for new investment when you need them: DSTs have capacity limits that, when reached, close them to new investors. COVID has especially shortened investment-windows to weeks and sometimes even days. Don’t list DSTs that won’t have capacity!

  • Offering an exit strategy suitable for your cash-flow and timing needs


Diversification Potential Adds Complexity


Also, it pays to be mindful that DSTs will permit Exchangers to have additional flexibility for potential diversification. DST investment minimums are often as low as $100k, hence, when suitable they offer the potential to provide some relief for investors facing property concentration risks. It’s not uncommon for an exchanger to sell one property and exchange into multiple DSTs. In some cases, that can be from a point of having a majority of personal net worth in a single property, in one neighborhood, and in one market and sector. By using several DSTs, the exchanger’s position becomes diversified across various markets, different real estate sectors, and management teams, risk profiles, use of leverage, etc. Optimally, prospective investors have the opportunity to consider a variety of potentially suitable DSTs.


Partner with Professionals


Exchangers should plan accordingly. That includes aligning with a reliable DST partner well in advance of deadlines so that you are best prepared to do what’s determined to be most suitable when the time comes.

Such a DST partner will advise you of where the market is, give you estimates on DST availability, and will have good relationships with DST sponsors that will help you reserve spots for DSTs expected to have very short availability windows.


Most importantly, Exchangers should understand the critical nature of the 45-day deadline and the potential for a potentially rapid decline in flexibility well before the 180-day deadline. When possible, Exchangers are well-served aligning the moving parts of a potential 1031 well in advance of their relinquished property sale. That includes moving forward on understanding replacement property types and the related market for finding what is goal-oriented and sensible for the Exchanger.

Johannes Ernharth, AIFA® is Mid-Atlantic Regional Director of Asset Strategy, a Private Wealth Management firm whose advisors take a fiduciary-driven, goal-oriented approach to become thought partners with their clients. He specializes in 1031 Exchanges and potential replacement property strategies.


Asset Strategy offers DST guidance backed by thorough due diligence that strives to make available a diversified array of Delaware Statutory Trusts that may be closed on in as little as 72-hours. Contact our team of 1031 professionals for a no-obligation consultation to gain insight to any questions you have!


This is for informational purposes only, does not constitute as investment advice, and is legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. There are material risks associated with investing in real estate securities including liquidity, 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, long hold periods, and potential loss of the entire investment principal. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. Statements concerning financial market trends are based on current market conditions, which will fluctuate.


Securities offered through Concorde Investment Services, LLC, member FINRA/SIPC Insurance offered through Asset Strategy Financial Insurance Agency, Inc. (ASFG) Advisory services provided by Asset Strategy Advisors, LLC (ASA), a Registered Investment Advisor. CIS is independent of ASFG and ASA.



BrokerCheck | Disclaimer Privacy Policy

DST1031HQ, CIS, and the furnishing representative and their associated firm do not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
 

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. DST1031HQ is independent of CIS.

© Copyright 2021 | All Rights Reserved | DST1031HQ

This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all services referenced on this site are available in every state through every advisor listed. For additional information please contact info@dst1031hq.com 

 

DST1031HQ is an investment platform.  DST1031HQ is not a registered broker-dealer. The furnishing representative and their firm are independent of  DST1031HQ and CIS. 

To access Concorde’s Form Customer Relationship Summary (CRS), please click here.