DST and 1031 Exchange Podcast: History of the Delaware Statutory Trust with Kay Properties

Join Matthew McFarland, Senior Vice President and Jason Salmon, Executive Vice President as they discus the history of the Delaware Statutory Trust.

We will be discussing:
  • How the 1031 exchange laws were formed out of Revenue Ruling 2004-86?
  • What exactly is the Delaware Statutory Trust structure?
  • What is meant by "passive ownership"?
  • How Delaware Statutory Trusts can help with estate planning?
  • DSTs vs. TICs . . . What's the Difference?

Register for Free Access to 1031 Exchange Delaware Statutory Trust listings.

Matt McFarland:

Thank you to all of our listeners. We really appreciate you carving out a few minutes of your Friday to tune into DST Essentials with Kay Properties. This is a series we've hosted for many months now, where we dive into many of the recurring themes and nuances, specifically as they relate to the DST 1031 Exchange investment process. For those of you who have listened in, in prior episodes, you know that this is more of a laid back conversational format, where myself or one of our other team members will interview one of the many members of the Kay Properties team, who each bring their own valuable and unique insights, formed by their vast 1031 Exchange transactional experience. So I'm very, very excited to continue this series today. But before we jump in, I want to give just a little bit of information about Kay Properties.

Kay Properties is the National Delaware Statutory Trust or DST Investment Firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different DST sponsor companies. This includes custom DSTs only available to Kay clients, as well as, on occasion, active DST secondary market listings. The Kay Properties team members collectively have over 130 years worth of real estate experience, are licensed in all 50 states, and have participated in excess of 30 billion dollars worth of DST 1031 investments. Today, I'm very excited to have Jason Salmon on the call with me. Jason is an Executive Vice President and managing director that heads up our New York City office. Jason brings over 20 years worth of commercial real estate and financial advisory experience to the Kay Properties team. Throughout his career, Jason has been involved in a wide range of industry roles, all contributing to his deep understanding of real estate investments.

Most notably, Jason was a founding member of a REIT and leverages his expertise to provide valuable insight to his clients when it comes to various DSTs and other private equity real estate investments. And today, I'm actually really excited about the topic we're going to be covering today. We're going to be kind of covering the history of the DST industry , going all the way back to the very beginning to where we are today, to provide a little bit of context and clarity, in terms of what this is all about. And honestly, I couldn't think of anyone more qualified to unpack this for us than Jason Salmon, a long time industry veteran. So without further ado, Jason, thanks for being with us, and welcome to the call.

Jason Salmon:

Thank you. It's good to be here, and we'll have a good chat.

Matt McFarland:

Looking forward to it. So let's start from the very beginning. How did this whole thing begin?

3:27 – The Start of the Delaware Statutory Trust and 1031 Exchanges

Jason Salmon:

So the whole thing, so there's a few things here. Let's bring it back to now. We know DST's predominantly our 1031 vehicle. That's a big motivator. It's fractional ownership. These are fairly large properties being purchased, run, managed, and then, sold by large companies. Pulling back then and answering your question, well, how did it all start? The 1031, on one hand, helps owners of investment real estate potentially defer taxes by buying other investment real estate. We could do that. It has nothing to do with DSTs, doesn't have much to do with us or even this call. People can do that completely and have been for a really long time. The 1031 or the like kind exchange has actually been on the books. If we're talking about history, it's been on the books for over a century, in one way, shape, or form.

The modern era of the 1031 Exchange kind of came into its current form in 1979, where some timelines and structural things were put in place, but it didn't really have much to do with DSTs or what we're going to really dig down into. But that's how we came to be where we are. I could give a tongue in cheek answer, which I will anyway. Since the dawn of time or closely thereafter, when people wanted to make a claim on their ownership of real estate, that's how it happened. And here we are today, but be that as it may, for the modern times we're living in, for investment real estate, there were ways for United States landowners and property owners to be able to defer taxes, by buying like kind property. Now, the Delaware Statutory Trust, DSTs, it's a trust, they, in themselves, in that format, have been around for much longer than what we're specifically talking about right now.

Because what ended up happening was, through a series of petitions, basically, folks in this industry determined, wrote to the IRS, ultimately getting what was called Revenue Ruling 2004-86 . So that basically said, at that time, that the Delaware Statutory Trust structure was eligible to 1031 Exchange in and out. So what about the Delaware Statutory Trust structure? Well, it allows for passive ownership, group ownership of larger properties. And I'll stop there, because there's other forms of it. And tenants in common, tenants in common ownership has existed for a real long time also. But what made it eligible for 1031 Exchange also occurred in the early two thousands, but it had been around for longer. Private equity real estate, so group ownership of real estate deals. We've all heard stories of friends and family get together, and they own a property together. It's not unlike that.

But this is not friends and family. It could be, to some extent. It's just really gone on a much, much larger scale. And oh, by the way, people probably have heard about REITs, real estate investment trusts. Those actually came to be through, on the tail end of a cigar tax bill in 1960, which tried to find a way for common investors, rather than institutions, to be able to have a seat at the table and own larger pieces of real estate and/or accrue, accumulate portfolios of that real estate. So while REITs are not eligible for 1031 Exchange, through the Revenue Ruling 2004-86, that's where the DSTs come into play, and there's certainly some nuance to it. But if you're on this call, we try to educate. We're having a nice talk, but I also encourage any of you, for clarification on this subject matter, to call your Kay Properties registered representative. Because every one of us will be able to walk you through these things. So hopefully, that gives a little bit. I know we kind of bounced around a little bit there, but hopefully, that answered your first question.

Matt McFarland:

No, that was really helpful, and I appreciate you framing everything within the realm of the 1031 Exchange. Because that's really important, obviously, to the eventual revenue ruling that landed in 2004, which allowed for this structure to officially qualify, per the IRS, for multiple ownership or group ownership real estate within the confines of a 1031 Exchange. And that a lot of people believe that that kind of evolved out of the TIC space, the tenant in common structure, where multiple owners can together own an undivided interest on a property, similar to a DST.

And so, the DST kind of seems to be the new and improved version of the TICs, in a lot of ways. So want to ask two questions there. Is there anything more you would want to add on top of the interrelatedness of the TIC and DST structures and format ? And then, two, kind of the next push here, I want to talk and ask your opinion on how you've seen the DST space change and evolve. So we're up to the early two thousands here. What have you seen take place, being in and around the industry from the early two thousands all the way through to today?

9:57 – DSTs vs. TICs

Jason Salmon:

I'll answer your first question within the second question. How's that? We'll be efficient. I think that the most important thing to understand is that what I'll just call group ownership implies that somebody is not doing it themselves. So for those that are just doing it themselves, it's not so much part of the conversation, but when it comes into the group ownership, the question is, "How much are you on the hook for? How much do you really need to do still, because you're a part of it?" And that'll make a lot more sense with what I'm about to say. So if you go back historically, and Matt, you just referenced it, the TIC, the tenant in common, TIC, tenant in common ownership, that was what was adopted early as far as group ownership for people that didn't have to do it themselves anymore, but still wanted to find the opportunity to conduct a 1031 Exchange and have the guidance from the IRS and all that stuff.

So that was prevalent. So let's just talk about the TICs, just very high level stuff, that the tenants in common can have up to 35 investors, very specific as to how that's set up. But likewise, there's some other things structurally in there, capital calls or cash calls there, if there's a mortgage on it, then many times, you might have to put your name on it and sign over some of your collateral against it. And those are just some structural things. And then, generally, as far as a tenant in common will go, a lot of times, you also have to have consent amongst each of the ownership. And so, that, in and of itself, many people could find it advantageous. And what happened though, at least in what we do, what I would consider a lot of people would call it institutional evolved a little bit once the DSTs, the Delaware Statutory Trust started gaining the popularity throughout the two thousands, a shift occurred.

I would actually say post-Great Recession. So once everything was kind of coming out of that time, that lasted 08, 09, 10, 11 even, maybe 2012, what you saw in the marketplace, again, the market itself is a much larger thing, but for where we dwell, a lot of the firms that we work with, the asset managers were moving towards the Delaware Statutory Trust. And a lot of these companies were doing the tenants in common. They just made the change. We will now, occasionally, see tenants in common deals, as it relates to our kind of space, but not as often as in the old days of it. So DSTs kind of came about and then, just started gaining momentum. But I'll tell you, I'll go further with your question, Matt. It's that, so first, with the DSTs, I gave you a couple tidbits about the TICs. With Delaware Statutory Trust, you can have hundreds of investors. It never really gets to that point. Totally passive. There's certain things that can and can't be done. The financing would typically be non-recourse, and it is a passive investment .

And for whatever it's worth, maybe it was the marketplace itself or maybe it was just the structure, but say, from 2012 through 2015, 16, I think that appeared to be kind of a ramp up period for the space. Maybe it was just transactional, but it's just how kind of things go with adoption and understanding. I frankly think our company had a lot to do with it, because of things like what we're doing right now, education, just learning about things, getting perspective. And I think that 2017 and 2018 and 2019 were kind of up and up years, as industry reports would've shown, to the tune of billions and billions and billions of dollars. It's significant. And we all know that 2020, at the beginning, couple speed bumps, but by the time the middle or latter part of that year, and certainly 21 and 22, this industry, as far as I can recall, went over 10 billion dollars, with a B, annually. That is something, and here we are today. And I'll leave it there. So hopefully, I answered those questions.

Matt McFarland:

I think that was really helpful and kind of contextually as DSTs and kind of the modern day DST industry kind of evolved out of the early TIC days, I think, is a relevant point. So I appreciate you walking us through that, Jason. And yeah, it's been amazing to see, even in my tenure here, over the last five and a half, almost six years, just how much this space has really grown. And I think there's a lot of room for potential growth as well, as we're positioned today. So that's kind of the last question that I want to talk with you about, Jason. More just high level is, what are some of your observations, even now, in terms of looking across the industry? And where do you see this going? Obviously, we don't have absolute certainty with anything. But any observations and maybe just looking forward to the future, where do you see some of those opportunities coming to fruition, if you will?

16:45 – Industry Observations and Opportunities

Jason Salmon:

Yeah, well, let's take a step back, and then, let's take a step forward. Just piggybacking on the last statements that we were making, just about the history in the last few years, understand that there are different pieces of the industry. Let's try to keep it as simple as we can. There's the mechanics of the 1031 Exchange, and a lot of people are doing 1031 Exchanges or this stuff. This stuff is the DSTs and private equity real estate as a category. But the asset managers, the sponsors, these are companies that are going out, like I had mentioned a few minutes ago, they're buying real estate deals that they feel that they can get behind. They come to our firm with their deals. Depending on the deal, we may or may not offer it to our clients. And the deals are dependent on their own investment strategy. They being the asset managers.

And so, over the past few years, as these things go, we've seen more asset manager. I can remember years ago, just a lot of times, fielding calls from asset managers, that are like, "Well, how can I get into this?" And there is a high barrier to entry to be an asset manager, to be a sponsor of DSTs, in that you've got to have a bit of history and experience with it. These are securities. You have to know about that stuff, and you have to dwell within the confines of those important things that have to be done. And then, the real estate part. So I've seen more sponsors get into the space. I've seen plenty more want to and not, but I've seen them get into the space. We've seen them bring more deals out and through, and it sort of ebbs and flows. Historically, I remember that, say, 10 years ago, there might have been five to 10 deals.

There could have been more, but I'm saying, for the, let's just call it mainstream space, if you can really call it that. And then, I've seen times, years ago, that there could have been 60, 70 DSTs at a time out there, and they're all just going. They're going, and there's a little something for everyone. And then, the part where we come in. So for us, we are working with accredited investors, trying to work with you to figure out which real estate deals, as DSTs, first, having you understand all the aspects of what it is, what we've been talking about here, and understand what you might be getting into from a real estate standpoint, as well as the risks, every single time. And so, I've even seen, historically, more companies and people that do what we do. And it's interesting, because we've also seen companies and deals and people that do what we do not anymore.

And that's fine. And so, it's all about the real estate deals. You want to want to feel good about what you're getting into. You want to work with a group and with people that I think are listening to what you're saying, know about what it is that we're getting into. That's just the name of the game. So where I'm going with this is, going forward, I think the great thing is that we have been consistent as a company to be able to give that perspective about it. There's not a lot of surprises. Although, like you just said, nobody can tell the future, that's for sure. And we'll certainly be the first to admit to that. But what we want to do is we want to try to be as matter of fact about the entire process as possible. And I see, going forward, clearly, the greater economy also kind of waxes and wanes, in both sentiment and also attachment to other things, like policy and politics and world events.

But here's what it really comes down to. If you're an investor and an owner of investment real estate and you eventually want to do a 1031 Exchange, but you just do not want to deal anymore with the very labor intensive aspects of it, or even not so much labor intensive, just to be an asset manager, as a private investor, you just might not want to have to deal with the real estate brokers and timing the market and what's next and all that. And I think it makes a case for DSTs for the right people. And I don't see that going away anytime soon. It's been really consistent. I think the biggest thing about the DSTs and their ability to help people is the ability for people to understand them and have the patience to understand them and not think automatically, "Well, this is just bigger business than I really want to get into or think about."

Most of our clients are your everyday next door millionaires, that have accumulated a modest real estate holding. Could be a single property or could be several, it could be small property, could be big property, but they're the ones that want to be able to utilize the 1031 Exchange. They're thinking about their future. A lot of times, they're beneficiaries. Sometimes, maybe just their own next 10 or 20 or 30 years or hopefully more. And that's where we come in. I think it's where the DSTs come in. So I see it going with the market continually. And as more people come to understand it and feel comfortable with it, I don't see any stopping for its popularity. I think it's just a matter of understanding and getting more people to know it.

Matt McFarland:

I think that was very, very well said, Jason. One other aspect I want to highlight is, yes, we have seen many more sponsors. We have seen many more offerings. And in a growing industry, that is mostly a good thing. More sponsors competing with one another to bring out viable products that could appeal to a group of investors is usually a good thing. But with that are, I believe, there's the greater importance to really understand, not just that sponsor and where they came from, but the performance of specific property types and specifically how they've played out over time in the context of a DST. And that's where, I think, the value really comes in with working like a firm, like a Kay Properties. Our founders started in the space in 07. Kay Properties, it was incorporated in 2010. So we've been around the space for a long time.

We've seen which companies have performed, which companies haven't, which property types have performed, which haven't. And ultimately, to Jason's point, it's really seeking that education first, being patient with the education to, first and foremost, figure out if this is a viable strategy. And for a lot of investors, who have a mass to modest real estate portfolio, who are getting to the point of their life that they want to consider selling, but ultimately, moving into more of a passive ownership structure, the DST could be a really good fit for them. But it's, first, really understanding that the nuances, the ins and outs, and determining which is kind of an appropriate portfolio, as it relates to that individual's specific situation. So I think that was all very well said, Jason. And I appreciate all the insight you brought to us, with respect to the history. I think it's really important for our listeners to understand where this has all come from and where it's ultimately headed. Is there anything you want to state here as we close the call out today?

Jason Salmon:

No, it's been a pleasure. I've enjoyed it. This is, again, what anybody on this call will get by calling their Kay Properties registered rep. It's a conversation about this stuff, only a lot more interactive. But yeah, this is what it's about. It's been great. I'm glad we were able to chat about this, and as long as hopefully, it helps gain a better understanding of what it's all about, then we've served our purpose.

Matt McFarland:

Completely agree. And with that, I want to thank all of our listeners for your time today. We do host this call live every Friday at 11 o'clock Pacific or two o'clock Eastern. So please do join us next week on DST Essentials with Kay Properties. And with that, I wish everyone a wonderful rest of your Friday and a fantastic weekend ahead. And we look forward to speaking to each and every one of you very soon. Thanks everyone, and take care.

DST 1031 properties are only available to accredited investors, which are generally described as having a net worth of greater than $1 million, not including primary residence. And accredited entities, which are generally described as either an entity which is owned entirely by accredited individuals or an entity with gross assets of greater than $5 million. If you're unsure whether you are an accredited investor or if you have an accredited entity, please verify with your CPA or attorney. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase securities, DST properties or real estate. Such offers are only made through a private placement memorandum or PPM, which are solely available to accredited investors and those with accredited entities.

Securities are offered through FNEX, Member FINRA and SPIC. FNEX and Kay Properties are separate entities. This material is not to be interpreted as tax or legal advice, so please speak with your own tax and legal advisors for guidance regarding your particular situation. There are risks associated with investing in real estate and Delaware Statutory Trust or DST properties, which include but are not limited to the loss of entire investment principle, declining market values, and in vacancies and illiquidity. Investors should read each PPM carefully before investing, paying special attention to the risk section. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor, so please speak with your CPA and attorney to determine whether an investment in real estate or DST properties is suitable for your particular situation.

Past performance is not indicative of future returns, so potential cash flows, returns and appreciation are not guaranteed and could be lower than anticipated. Thank you everyone for listening in. Now I'd like to turn the call over to Tommy Olsen, Vice President with Kay Properties and Investments.