DST Essential Podcast: Case Study

Join us for the DST Essentials with Kay Properties along with Matthew McFarland, Senior Vice President and Tommy Olsen, Vice President for a conference call discussing a particular DST investor case study.

We will be discussing:
  • Investor DST Education
  • The Importance of Staying Debt-Free
  • DST Investment Customization
  • Diversification Amongst Asset Classes

Tom Wall:

Hi everyone. Thank you for patiently waiting. My name is Tom Wall, a senior associate here at Kay Properties, and thank you so much for joining us for DST Essentials with Kay Properties where we take an in-depth look at the different aspects of the DST 1031 exchange investment process. We'll be getting the call started with a few risks and disclosures.

DST 1031 properties are only available to accredited investors, which are generally described as having a net worth of more than $1 million, not including their primary residents. And accredited entities, which are generally described as an entity either 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 and attorney. The information herein has been prepared for educational purposes only and does not constitute an operative [inaudible 00:01:00] 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 SIPC. 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 investors 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 circumstances. Past performance is not indicative of future returns, so potential cash flows, returns and appreciation are not guaranteed, 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.

Tommy Olsen:

Thank you Tom and hi everyone. Thank you so much for joining us today. We're going to have a great time today on DST Essentials with Kay Properties where we take an in-depth look at the mini recurring themes and nuances to the DST investment process. In this series, we'll be interviewing many members of the Kay Properties team who each bring their own unique and valuable perspective that they form over their vast transactional experience in the DST investment landscape. Before we introduce our special guest today, I'm going to start with a little bit about Kay Properties. Kay Properties is a national Delaware Statutory Trust DST investment firm. The https://www.kpi1031.com/platform provides access to the marketplace of DSTs from over 25 different DST sponsored companies. This includes custom DSTs only available to Kay clients and an active DST secondary market listing. Kay Properties team members collectively have over 400 years of real estate experience, are licensed in all 50 states and have participate in over $30 billion worth of DST 1031 investments.

I'm very excited to have our very own Matt McFarland on the call today. Matt is a Senior Vice President, works out of our Kay Properties headquarters office in Los Angeles, California, helping clients with their 1031 exchanges and direct investments. Since joining Kay Properties, Matt has participated over 1,300 transactions and over $15 billion worth of real estate. Matt works hand in hand with all the Kay Properties Executive Vice Presidents, educating clients on what particular investments make sense for their situation. Today we're going to be discussing a very specific case study on a recent 1031 exchange transaction completed by a family out of Northern California. Our goal is to provide insight into how decisions was made and to initially pursue the DSTs and how the investment process was approached and eventually completed. Matt, welcome to the call and thank you for being with us.

Matt McFarland :

It's my pleasure, Tommy. Thank you for hosting.

Tommy Olsen:

Yeah, my pleasure as well. So let's begin with some context, Matt, on this particular investor, can you provide us some brief background information about their situation?

04:50 – Investor DST Education

Matt McFarland :

Absolutely. So this case initially began very similar to many other cases that we work with. The investor initially approached us hoping to learn more about the DST structure. They had a 1031 exchange out kind of in the distance, nothing immediate. This was early summer 2021 when we began early conversations and really just kind of dove headfirst into education with them. We learned a little bit about their situation. A large family investor out of northern California owned a number of larger industrial and other commercial properties. There was some legal background, so a little bit higher level of sophistication right out of the gates. But in terms of the education, it really began with them really wrapping their arms around the structure to figure out if this was or if this would be a viable solution or option for them to consider once they were in a 1031 exchange in the future.

When they approached us, once again, they didn't have an immediate need but knew that they would in the years to come. So education starting with many kind of individual conference calls, answering specific questions. They attended our webinars, Friday calls like we're hosting today. We even went through a number of PPMs and kind of dove into some of the more nitty-gritty details. Once again, all with the goal to figure out if this was a viable solution for them. And so over six to 12 months we kind of slowly went through that process with them and the net result, which we'll get into is them actually kind of moving and selling one of their properties and pursuing DSTs as a result.

Tommy Olsen:

Well, that's really great background information and that's so cool that these calls were what really helped them get comfortable with this structure and start to understand it more as part of the education process for them, that really span sounds like about a year time period. And you also mentioned the webinars, in case any listeners haven't attended one of those webinars, here on the Friday conference call, we're going to dive deeper into different nuances of the DST investment process, but that Wednesday webinar is really the basics course. That's the 101. So attend on Wednesdays at 11:00 AM Pacific time, 2:00 PM Eastern time, and you can get the introduction to the DST 1031 exchange. But here we're going to do something different every week so just kind of do a little plug for that there. So what did they actually end up selling Matt? Which property was it that they chose to dispose?

08:11 – Investor Exchange Details

Matt McFarland :

Yeah, so they actually sold a larger industrial property that they've owned for many, many years out of Northern California. Just a few details on the sale. So I mentioned they first engaged with us in early summer 2021. The sale was not finalized until fall of '22, so it kind of spanned about 15 months from the time they first engaged to the time that they actually were in a relevant position to consider specific DSTs , which I think is pretty cool, just the amount of time and that's not uncommon. We have investors that approach us with an exchange maybe right in front of them in a month, two months, three months. We have investors that have been engaged with us for four or five years before they actually transact. So I think that's a powerful testament to the educational process. But anyways, shifting gears back to the sale.

So this larger industrial property, they owned all cash, sold for a little bit less than $10.7 million. The family decided to take 650,000 in boot and pay tax on it. They had some liquidity means for various reasons. And so what it all came down to is they had about nine and a half million that was sent to a qualified intermediary to conduct a 1031 exchange. And typically whenever we're dealing with this sum of money or an investor is dealing with a larger sum of money, obviously they have many more options that they can consider with respect to purchasing power. Nine and a half million can go much further than an investor who's considering an exchange for $400,00 or $500,000. So they were certainly considering all their options as they should. They were considering buying another kind of triple net or net lease type property, multiple triple nets that they could manage on their own.

They were considering DSTs and a number of other approaches. And really ultimately what led them to DSTs was the fact that one, they couldn't get comfortable with what was available kind of more on the traditional side with respect to cap rates and opportunities that were available in the market at that time. And then on top of that, like many DST investors, they really wanted to hedge concentration risk and really, really wanted to stay debt free and they were able to do that much more easily by taking smaller positions in a number of DST properties. I think in addition to that, the quality of property that they were able to access on a fractional partial basis in a DST was even much higher than what they would be able to access with the nine and a half million that they had in the exchange.

And then the last thing, the last aspect too was management. I think there was definitely a concerted kind of push and decision that was made to take more of a backseat to active management . So all of that ultimately led them in the direction of DSTs and we'll kind of talk a little bit more about how that whole process went in terms of the investment, but that's a little bit more context in terms of the transaction and the ultimate decision that was made.

Tommy Olsen:

Yeah, that's great. So avoiding concentration risk and then the benefit of diversification with the DSTs, that's something that is really important to a lot of our investors and I'm glad you brought that up, but you brought something else up which... you said they wanted to stay debt free with these DSTs, it sounds like they have a lot of other assets. This isn't their whole net worth in this one exchange. And so why was it for them in particular that it was important to stay debt free in this exchange? Couldn't they have taken some additional risk with adding some debt and then had some potential benefits there... where were they coming from?

13:28 – The Importance of Staying Debt-Free

Matt McFarland :

Yeah, good question. So like I mentioned, this was a family exchange and I think what it came down to with respect to the decision to stay debt free is they were ultimately, they're at a position as a family where they have created enough wealth that they're less focused on squeezing everything out of their real estate as it relates to tax efficiency and the potential benefits that debt could bring, which there certainly are benefits of taking on debt, but for them the higher priority was positioning for principal preservation and ultimately, there's a much higher chance of that by staying debt free and they understood that. On top of that, the DST structure can pose certain limitations as it relates to the financing or refinancing in the future, which was a risk that we had kind of discussed with them. And I think we were all in agreement that the debt free approach was what ultimately made sense to them at the time.

I think also just to provide additional context, this transaction took place in the very end of 2022. There's a little spillover to '23 as well, but I think there was also kind of a greater concern in terms of timing of when they're entering back into the real estate market. Real estate has performed very, very well. We've been definitely at a very high point in the cycle. And so I think there was concern where they wanted to position for ultimate holding power and that holding power is most easily achieved in an all cash setting where there's no worry about any loans coming due, anything that could influence an early sale that could impact the value of their position in that DST at disposition. So there are a lot of different components to it, but that was ultimately what they based their decision on.

Tommy Olsen:

That's really helpful. Thanks for explaining that. And then so what was it... and I imagine that that might have been part of it, the access that we get to debt free product here at Kay Properties, but why would you say that they ended up choosing to work with Kay Properties and what was their investment approach when... they came, they said, "Okay, hey, we want to move forward working with you," or how did that go, Matt?

16:28 – Kay Properties Access to Vast Marketplace

Matt McFarland :

Yeah, good question. We mentioned it, access to an array of different offerings. We do specialize in some way with the debt free DSTs. We have considerable access to those through the various relationships that we have in the space. I think on top of that, our philosophy in terms of how we approach the investment space was really something that they agreed with. So we kind of saw eye to eye with the overall approach. Beyond that, just the knowledge that we brought to the table and experience that we had relative to other companies that offer DSTs I think really was what did it for them in terms of deciding to work with Kay Properties. We were just able to provide them so much more experience and then ultimately access into properties that were relevant for them. And I want to, with that, jump into their approach, which I think was really interesting and kind of unique with respect to the timing of their transaction and the total value of the transaction as well.

So instead of lining up a number of different DSTs and immediately closing on those DSTs and kind of putting the exchange in the rear view, which is what many DST investors will do, I think for them they decided to take more of a gradual and systematic approach to investing over a little bit of a larger expanse of time. Part of this was because during the 45-day identification period, they were still keeping their eyes open to other opportunities. So what they decided to do is they kind of systematically and gradually would close on smaller increments into DSTs throughout the 45 days. And then we actually helped them identify a number of options using the 200% rule where they would have the ability to not only come back to some of the properties that were available within their 45 days that would likely still be available beyond day 45, but also there were a number of upcoming projects that weren't officially available yet within their 45 days that they could have interest in, that we actually identified as well.

And so we kind of structured their ID sheet in such a way where we identified a number of different opportunities where they can pick and choose after the 45 days based on what actually came available and what they ultimately decided on with respect to the remaining proceeds. And it actually worked out really well because they were able to close on about half of their exchange value within the 45 days. The other half was closed on after. And so under the 200% rule, because they were identifying all debt free DSTs, we were able to really max out that identification sheet and provide them so many different options with that last call it, four or 5 million dollars that they had to place. And a number of the deals that we actually had them identify at least one or two of them, they actually didn't end up coming to fruition.

There was something that came up in the sponsor's due diligence that led them to not go forward with the closing, but we were so insulated with respect to all the different kind of alternative pathways that we could go in terms of how we structure the ID sheet that they still had plenty of options to consider. And so start to finish from the first purchase of their initial DST, all the way to the last purchase span about three months or 90 days, which is longer than most DST investors and it's not necessarily an approach that we encourage all investors to do. It just so happened with their situation, we were able to walk alongside them and operate in a way that ultimately provided flexibility for them and in a way to match this specific approach that they wanted to take.

And I think that's a huge benefit to the DST structure is we have so much more flexibility because of the fact that these properties are pre-packaged, they're built specifically for 1031 exchange investors and then on top of that, with the Kay properties platform, we have access to so many different offerings that could potentially be compelling to a given 1031 exchange investors. So all in all, they ended up buying nine different DSTs in the process and were able to ultra diversify across a number of different asset classes that they were ultimately comfortable with.

Tommy Olsen:

Wow, nine different DSTs. And you said they had about $9 million, so was that about a million dollars per DST or did they custom tailor fit it according to their... they liked something more than another?

22:52 – DST Investment Customization

Matt McFarland :

Yeah, good question. There was definitely some customization that took place. There were certain properties that they decided to allocate a little bit more to than others, and that had to do with a number of different reasons. I'll give a quick example. One of the properties that they identified was actually a portfolio DST. So there were multiple properties bundled into one DST package and something like that they were comfortable allocating a few more dollars versus maybe a smaller single asset DST where they decided to pair back a little bit. So it was actually a little bit more customized, which is kind of what we were talking about before with the flexibility of being able to decide exactly how many dollars our investors want to allocate to specific real estate deals, which I thought was really interesting and for this transaction specifically.

Tommy Olsen:

Yeah, definitely. And three months or so to finish, we see people finishing a 1031 exchange in the DST property sometimes in three days. So I guess this one kind of probably felt a little bit dragged out, but it's great that they were so systematic and it kind of reminds me of the way that you think and work, Matt, yourself, I'm sure you're a good fit for them and their family because you're a very systematic thinker and have a logical approach and intentional with the decisions that you make. So yeah, I'm glad that you were able to help them. What types of properties did they actually invest in? What sort of diversification did they get across different asset classes?

24:47 – Diversification Amongst Asset Classes

Matt McFarland :

Yeah, good question. I appreciate the kind words, Tommy, and I think I will agree with you, this is not an approach that we necessarily encourage for most investors to take. For them it was what they were most comfortable with. And we had talked about the closing risk that's apparent whenever we go beyond the 45th day, and that's certainly not something that we take lightly, but ultimately it was what they were most comfortable with. And so that's what I want to address here is ultimately this is their money, this is our investors' money. We're not the ones that are deciding when and how that money is invested specifically, we're partnering with our investors, offering our advice, walking alongside them in a manner that they ultimately feel comfortable with, but also interjecting and offering valuable insight into timing and approach and how everything works based on our experience and our unique positioning in the DST space. So just wanted to mention that.

In terms of the properties they purchased, so I mentioned nine different DSTs, they purchased a couple of self-storage properties, a couple of distribution and industrial facilities, multifamily, a pharmacy, retail properties, even built for rents, single family home communities. So definitely a very, very diversified spread. And we kind of stuck to more of the core more predictable asset classes. Of course, we have some storage and multifamily that tend to provide a little bit more potential for growth and upside in the long term, maybe a little bit more potential volatility with respect to cash flow, and then some of the more long-term single tenant net lease type properties, which would be kind of that distribution, industrial, pharmacy properties, other commercial type buildings to provide that stable base from them for them. So all in all, definitely they were able to access a significant amount of diversification through taking positions in so many different DSTs with so many different asset classes in different parts of the country that ultimately are positioned uniquely and separately, but all contribute to this greater tax advantaged real estate portfolio that they were able to move into through the DST structure.

Tommy Olsen:

Very nice. Cool, thank you. So they kind of took that anchor and buoy approach like we talk about here with having the stable solid long-term net leases and then a little bit of an upside on the storage and a multifamily and built for rent, sounds like. Great, but that was their decision ultimately, this whole thing like you're talking about where we can provide guidance, talk from our experience, but at the end of the day, it's the investors who are the ones who get to decide for themselves what they're going to do with their exchange. And so is there anything else that you wanted to add, Matt? Because I think that what this leads into kind of a segue way is reaching out to someone's registered representative if they haven't already done so and kind of have a conversation with a Kay Properties team member and finding out how they can leverage that experience for their own situation. But what would be some good questions to start for them in that conversation, Matt? What do you suggest?

29:09 – Questions to Ask Your Registered Representative

Matt McFarland :

Yeah, good question, Tommy. I think just continuing to push as it relates to education. That's something we're really, really big on at Kay Properties. We really want to make sure that this is the right fit for the investors that we're working with. And the only way we're going to be able to do that is to have engaging conversations with prospective customers to understand not just their situation, but have them understand what we're able to provide. And that's a combination of really kind of wrapping their arms around the structure of the DST, but also of looking into our platform and what Kay Properties can specifically provide to them as it relates to DSTs so that we can get to a point where the investors very clearly informed and at ease as they lead into their 1031 exchange transaction.

So would really encourage everyone on the call, please reach out to your Kay Properties representatives. We're here to answer questions, we're here to provide insights and continue to engage with us in formats like this. Hopefully, this conversation was helpful today and other conversations we've had in the past on these Friday calls, Wednesday webinars, various webinars and events that we host. We all do this ultimately to get the word out on DSTs and to provide that valuable education for investors. So that would be kind of my call to action here at the end.

Tommy Olsen:

That's great. Yeah, thanks Matt. So yeah, so keep listening, tune in every Friday to the DST Essentials conference call, and if you want to listen to past episodes, then choose your podcast provider and look for Kay Properties DST Essentials there. You'll be able to listen to over 75 different recorded episodes that have been, in most of them with our very on Matt McFarland as the host, interviewing different team members from the Kay Properties team here. And then also read those PPMs, very exciting, very entertaining for you. And then read through our blogs, which are also, I think written reader friendly and ask questions and call up your representative. Come meet us in person, if you don't live in Torrance or Southern California, that's okay. We can come to you and we're happy to do that and just to continue the education process.

So thank you again, Matt, thank you so much for joining us today. We appreciate your time and thank you everyone else for carving out a few minutes with us on Friday today here, and remember to log in the Kay Properties marketplace, www.kip1031.com to view 20 to 40 different DST offerings from 25 different DST sponsored companies. Call us (855) 899-4597 to speak with a Kay Properties representative who can walk you through your options. Thank you again, Matt, for all the information you share with us. Join us next time on DST Essentials with Kay Properties, an in-depth look at the various aspects of the DST 1031 exchange investment process.