By: Jason Salmon, Senior Vice President and Managing Director of Real Estate Analytics – Kay Properties and Investments, LLC
Based on our history and the hundreds of clients that we’ve worked with for their 1031 exchange replacement property—I believe that this case will be highly relevant and relatable to a lot of people.
A real estate investor named Ted inquired with Kay Properties a few months prior to the sale of his investment property that had been owned for many years. Through dialogue with a leading NNN brokerage, Ted had pretty much made up his mind that the best way to own real estate passively was via NNN real estate. Notwithstanding, Ted still wanted to understand DSTs, and how they might be used in his situation.
For several months, we continued to update Ted on new DSTs (especially those relevant to his particular situation), those that had become fully subscribed, and about market conditions for various commercial real estate sectors.
With days rather than weeks left in his 45-day 1031 exchange identification period, Ted called me to discuss if a DST property could be used as a backup in case either one of the NNN properties he was pursuing was to fall through. The answer: Yes.
So, if Ted could not secure the Wendy’s or the bank branch that the NNN broker presented, he would still be able to uphold the 1031 exchange by investing $2 million into a DST. Over the course of the next few days, Ted looked very closely at several DSTs. We talked at length about various asset-classes, including NNN real estate packaged in DSTs as well as other offerings in the DST market at that time.
Two days before his identification period was to expire, Ted called me first thing in the morning and said that instead of investing in a single NNN property for $2 million and use DSTs as a backup, he wanted to diversify* and invest into multiple DSTs to diversify his hard-earned equity. His logic was: 1) he wasn’t confident enough in the sellers of the NNN real estate performing, potentially jeopardizing his 1031 exchange and costing hundreds of thousands of dollars in taxes that wouldn’t be able to be deferred; and 2) he didn’t really want to own either a Wendy’s or a bank branch. At the time it seemed like a good idea, but the farther down the line he got, he just didn’t want to deal with the uncertainty of owning a bank branch when the lease was to come due in ten years combined with the pressure that online banking continues to place onto retail bank branches. Additionally, he didn’t want to have to determine the value for NNN real estate if most of the primary lease term has burned off and the tenant decides to vacate the building—often causing a drastic reduction in equity value to the landlord. We were able to help Ted close on multiple DST properties quickly, which suited his financial needs, goals and objectives.
I recently checked-in with Ted and he mentioned that he wished he had decided to go with DSTs from the start because it would have saved him a lot of time and energy during those weeks looking every which way at NNN deals, competing with other potential buyers and brokers, the stress of the 1031 exchange timeline, etc. We’re just glad that we had a number of DSTs that were viable options for Ted and that after narrowing them down by way of our due-diligence and vetting process, he got what he wanted and we’re proud to be able to now call him a Kay Properties client.*Diversification does not guarantee profits or protect against losses.