By Chay Lapin – Senior Vice President Kay Properties and Investments
Please find below a case study when considering purchasing NNN properties versus alternative options such as DSTs.*
Is a NNN Property the way to go for my 1031 exchange?
Are you considering to purchase and manage a (NNN) Net Lease Property on your own?
1. Are you prepared for the potential active management? NNN properties are only passive if everything goes well. What happens if they do not?
If a NNN Property goes dark (tenant moves out) or bankrupt, are you ready to search for a new tenant, negotiate a new lease, negotiate with tenants and lenders, pay lawyers, manage leasing agents, higher contractors to renovate, etc. We have had clients 1031 exchanging out of their NNN properties because their NNN broker communicated half truths about NNN being a turn key option. NNN’s are great, until they’re not. Investors are exchanging out of NNN nightmare situations that a NNN broker didn’t walk them through the potential downfalls of NNN properties all too often…
2. Are you willing to take a multimillion-dollar company to court?
We have seen large companies bully their way out of a lease agreement because the landlords/building owners are too small to afford a costly litigation. Therefore the owner has been left with tens of thousands of dollars in maintenance costs or unpaid/reduced rent. Not only does this negatively impact your potential cash flow, it also impacts the overall value of the building and your family’s financial security. Many NNN investor clients that we worked with that were told by their NNN broker they were buying a “safe” property have found themselves with properties valued at significantly lower values and lesser returns. Although corporate tenants can do this to anyone… This is more difficult for these companies to do when the landlord is represented by a real estate equity firm with hundreds of millions or billions of dollars of real estate under management which is why the DST may be a fit for investors afraid of these scenarios.
3. Are you prepared to do your own comprehensive due diligence required to purchase a NNN property that is such a large component of your wealth?
On all our DST properties, we conduct/review lease audits, environmental reports, insurance audits, building inspections, economic/demographic surveys, and we send someone to conduct onsite inspections. This can be a very costly and a time consuming process that many NNN buyers don’t have the time or experience to do themselves. Has your broker done that for you or are you prepared to do this on your own?
4. Do you feel comfortable with all your eggs in a single NNN basket
Putting a large component of one’s wealth into a single NNN asset is simply not wise. Why would one invest in a single NNN property, when you can get access to the similar type of NNN properties but in a diversified strategy whereby you don’t have all of your eggs in one basket? **
5. One of the greatest questions 1031 clients ask themselves, “what kind of legacy will I leave my family when I am gone?”
Are your wife or heirs able to take on any of the above situations if you are not around to manage these issues? Selling a property years into the lease can result in pennies on the dollar, especially if there are issues and they will be left to negotiate lease terms with a large fortune 500 company. Many NNN investor clients that we worked with choose DST investments since the sponsor company will be handling these items and not their wife/heirs who may not have the real estate experience to properly asset manage a NNN property.
*These examples are the experiences of a few of our clients and may not represent the experiences of others. Past performance does not guarantee or indicate the likelihood of future results.
**Diversification does not guarantee profits or protect against losses.
Using (DST) properties as opposed to NNN properties for your exchange:
• Diversification – Don’t put all your eggs into one basket!
• You can often close on a DST in 2-3 days – helps to potentially reduce 1031 exchange closing risk.
• Non-recourse financing with DSTs as opposed to partial and full recourse with NNN properties.
• Back up – Use a DST as a backup ID in case your NNN deal falls apart.
• DST as a home for leftover funds to cover your exchange and avoid boot.
• Professional asset and property management in place.
Access to Quality Real Estate
Often times, 1031 investors are selling a property that comprises a substantial amount of their net worth. DST 1031 properties provide access to real estate that is often otherwise outside of an individual investor’s price point. With the typical minimum investment of $100,000, investors are still able to purchase an ownership interest in large $20 million-plus apartment communities, $5 million-plus pharmacies or $15 million grocery stores, for example. This allows investors access to a level of real estate that they just would not have been able to exchange into before.
That being said, we also have had many clients with very large 1031 exchanges opt to invest in multiple DST 1031 properties/offerings because they did not want to place “all their eggs into one basket” by purchasing one single, large NNN investment property.
For a list of current DST offerings available at Kay Properties please visit www.kpi1031.com or call 1.855.466.5927.
About Kay Properties and Investments, LLC:
Kay Properties and Investments, LLC is a national Delaware Statutory Trust (DST) investment firm with offices in Los Angeles, San Diego, San Francisco, Seattle, New York City and Washington DC. Kay Properties team members collectively have over 114 years of real estate experience, are licensed in all 50 states, and have participated in over $9 Billion of DST real estate. Our clients have the ability to participate in private, exclusively available, DST properties as well as those presented to the wider DST marketplace; with the exception of those that fail our due-diligence process. To learn more about Kay Properties please visit: www.kpi1031.com
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. 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. 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. This material is not intended as tax or legal advice.
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.