This guide outlines the key steps, questions, and considerations to help you identify trusted DST sponsors, set up a 1031 exchange process, and analyze DST investment opportunities effectively.
I. Finding Trusted DST Sponsors
A. Qualities to Look For:
1. Reputation and Track Record
a. Proven history of successful DST offerings.
b. Experience managing similar property types
2. Transparency
a. Clear disclosure of fees, projected returns, and associated risks
b. Access to historical performance data on previous DSTs
3. Financial Stability
a. Sponsors with strong financial backing to handle market downturns or challenges.
B. Where to Find Sponsors:
1. Real Estate Investment Firms: Specializing in DSTs and 1031 exchanges.
2. Professional Recommendations: From real estate attorneys, financial advisors, or CPAs.
3. Industry Resources: Use databases like the National Association of Realtors ® (NAR) or the Investment Program Association (IPA).
C. Questions to Ask Sponsors:
1. What is your track record with similar properties?
2. Can you provide historical data on returns for past DSTs?
3. What fees are associated with the investment (upfront, ongoing, and exit)?
4. Is the property leveraged, and what is the loan-to-value (LTV) ratio?
5. What is the projected holding period for the DST?
6. What is the exit strategy for this property?
II. Setting Up the 1031 Exchange Process
A. Step-by-Step Process:
1. Engage a Qualified Intermediary (QI):
a. Ensure the QI is experienced and reputable. They will hold the proceeds from your property sale to comply with IRS rules.
2. Sell Your Relinquished Property:
a. Work with the QI to structure the sale in compliance with 1031 exchange requirements.
3. Identify Replacement Properties:
a. Identify up to three replacement properties within 45 days of selling the original property.
b. DSTs simplify this process by offering ready-to-invest properties.
4. Close on the Replacement Properties:
a. Complete the acquisition of DST interests within 180 days of the sale.
III. Analyzing DST Opportunities
A. Property Due Diligence:
1. Type and Location:
a. Is the property in a growing market with strong fundamentals?
b. For niche properties like marinas, asses demand and competitive positioning.
2. Tenant Quality:
a. Review tenant leases, financial health, and long-term stability.
b. Look for properties with creditworthy tenants and long-term leases.
3. Market Conditions:
a. Evaluate local and national economic conditions for rent growth and property appreciation.
B. Financial Metrics:
1. Projected Returns:
a. Analyze the annual cash flow yield (4-6% is typical for DSTs).
b. Review the Internal Rate of Return (IRR), for the projected holding period.
2. Leverage:
a. Avoid overly leveraged DSTs; aim for an LTV ratio below 50% for lower risk.
3. Expense Ratios:
a. Check for transparency in acquisition, management, and disposition fees.
C. Exit Strategy:
1. Confirm the sponsor’s plan for selling the property.
2. Ensure the timeline and strategy align with your investment and tax planning goals.
IV. Sample Sponsors and Resources
Below are a few established firms that specialize in DSTs:
- Inland Private Capital Corporation
- Kay Properties and Investments
- Pasadena Exchange Group
- Capital Square 1031
These companies offer diverse DST portfolios and provide tools to assist with your 1031 exchange.
V. Next Steps
A. Immediate Actions:
1. Engage a Qualified Intermediary (QI):
a. Identify a QI and ensure they are experienced in 1031 exchanges.
b. Draft a list of questions to assess their capabilities.
2. Research Sponsors:
a. Reach out to 2-3 reputable DST sponsors to discuss current offerings.
b. Request detailed prospectuses for available DST investments.
3. Consult Legal and Tax Professionals:
a. Engage a real estate attorney and CPA to review the exchange process and investment documents.
B. Additional Tools:
1. Checklist for Evaluating DST Offerings:
a. Income projections
b. Fee transparency
c. Leverage levels
d. Exit strategy alignment
2. Comparison Template:
a. Create a matrix to compare multiple DST investments on key metrics like projected returns, risk, and diversification potential.
Checklist for Evaluating DST Sponsors and Offerings:
A. Evaluating Sponsors
1. Reputation and Experience:
a. Does the sponsor have a track record with similar property types?
b. Are they transparent about past performance?
2. Financial Stability:
a. Does the sponsor have strong financial backing?
b. What is their history of navigating market challenges?
3. Transparency
a. Are all fees clearly disclosed (upfront, ongoing and exit)?
b. Do they provide detailed prospectuses and investment documents?
B. Analyzing DST Offerings
1. Property Location and Type:
a. Is the property located in a high-growth or stable market?
b. Does it align with your risk tolerance and investment strategy?
2. Financial Metrics:
a. What is the projected annual cash flow yield?
b. Is the leverage / loan-to-value (LTV) ratio below 50%?
c. Are the expense ratios reasonable?
3. Tenant and Lease Quality:
a. Who are the tenants, and how financially stable are they?
b. Are leases long-term and secure?
4. Exit Strategy:
a. What is the anticipated holding period?
b. Does the exit strategy align with your long-term goals?
C. Draft Communication Templates
A. Reaching out to Sponsors:
Subject: Inquiry about DST investment opportunities
Dear [Sponsor’s Name]:
I am exploring DST investment opportunities as part of a 1031 exchange strategy. I’m interested in learning more about your current offerings, particularly those that align with [specific property types or investment goals).
Could you please provide me with the following information:
- Details of available DST properties, including locations and financial projections.
- Your track record managing similar properties.
- Fee structure and projected holding periods for your offerings.
- Any additional materials or prospectuses for review.
Thank you.
[Your Name]
[Your contact information]
B Reaching Out to Qualified Intermediaries
Subject: Inquiry about qualified intermediary services for 1031 exchange
Dear [ QI’s Name]:
I’m planning a 1031 exchange and am seeking a qualified intermediary to assist with the process.
I would like to learn more about your services and experience. Specifically:
- How many 1031 exchanges have you facilitated in the last year?
- What is your fee structure for handling transactions?
- Can you provide references or case studies of successful exchanges?
- What additional support do you provide during the identification and closing phases?
Thank you.
[Your Name]
[Your Contact Information]
