Kay Properties President, Chay Lapin featured on Millionacres Podcast to explain Delaware Statutory Trust Investments

Taxes can loom large in our lives but one of the great things about investing in real estate in the first place is that there are structures that can help. One of them is DSTs, Delaware Statutory Trusts. If you’ve never heard of these or you or are curious to learn more this is the podcast for you. Deidre Woollard interviewed Chay Lapin of Kay Properties covering what investors need to know about DSTs and how to use them in investing.

 

0:00 Introduction

1:36 What is a DST?

2:47 Why were DSTs created

3:38 How is a DST different from a 1031 exchange?

5:31 Can DSTs be used in fractional ownership

7:41 Can you go from a crowdfunded deal to a DST?

11:51 How do 1031 exchanges work to protect you from taxes?

13:17 Do you have to be accredited to use DSTs?

14:03 What is the average minimum investment on the Kay Properties platform?

16:04 Which investors is a DST right for?

18:17 Could new potential legislation impact DSTs?

21:22 Urban Catalyst ad

23:21 Diversifying with DSTs

25:08 What types of investments are available?

27:10 What is the operating structure of a DST?

29:34 Sponsor communication

31:13 Geographic and sector diversification

34:08 Property sourcing

35:29 Due diligence

38:55 Non-recourse financing

40:08 The education process for investors

42:02 Hold times on DSTs

43:59 Current deal flow

46:28 How Chay’s past as an Olympic athlete connects to real estate investing

Transcript

You are listening to the Millionacres Podcast. Our mission at Millionacres is to educate and empower investors to make great decisions, and achieve real estate investing success. We provide regular content and perspective for everyone, from those just starting out to seasoned pros with decades of experience. At Millionacres, we work every day to help you demystify real estate investing.

Deidre Woollard: Hello, I’m Deidre Woollard, an editor at Millionacres, and thank you so much for tuning into the Millionacres podcast. I would say that the number one question that our team at Mogul gets is about tax structures. I find this interesting, I feel like they’re more interested sometimes in taxes and avoiding taxes than the return on the investment. Taxes, I think, just loom large in our lives, but one of the great things about real estate is there are structures that can help, and one of them is DSTs, which is Delaware Statutory Trust. We get a ton of questions on these. If you’ve never heard of them, or like me, you’re just curious to learn more, this is podcast for you. My guest today is Chay Lapin of Kay Properties. Welcome, Chay.

Chay Lapin: Well, thank you for having me. Really appreciate the opportunity to educate your listeners on the DST structure.

Deidre Woollard: Awesome. Well, let’s not keep people waiting any longer. What exactly is a DST?

Chay Lapin: Yeah. There’s a lot to unpack here, which I know we’re going to dig in through this time we have together, but in short, the DST, it’s an entity, it stands for Delaware Statutory Trust. The reason why we utilize that structure or that entity, or wrapper that is around the real estate, similar to an LLC or a partnership structure that owns the real estate, we use the DST because the IRS in the early 2000s has deemed the DST structure for light kind 1031 exchanges. It’s a big game changer for fractional ownership. The DST in the real estate world, is primarily used to own a piece of real estate. That’s the unique thing for our investors. I know we’re going to dig into the different ways investors utilize them and the different types of investors that it works well for, but the biggest item here is the DST is ultimately utilized for that deferral of tax through the 1031 exchange.

Deidre Woollard: Why were DSTs created in the first place?

Chay Lapin: There was institutional mid-sized firms that were utilizing or trying to discover ways to make fractional ownership more friendly. I think the old school way, and it still exists today. We utilize it sometimes as a lot of people are familiar with the Tenant In Common structure, or TIC or TICS as some people refer them to. Although those can be really good for certain types of business plans, there were also a lot of issues with that structure. The DST created, most people would argue, just a smoother process. But it’s the same idea as a TIC in some regard that you’re fractional ownership around it, but it’s just a little smoother of a process to invest.

Deidre Woollard: Interesting. How is a 1031 DST different than a traditional 1031 exchange?

Chay Lapin: In a lot of respects, they are very similar. The way that they work, to speed people up that might be listening, that aren’t familiar with the 1031, the 1031 exchange is utilized if you sell investment property, in our case, our specialization, sometimes the business, but primarily you sell an investment property and you’re going to face a potential high tax consequence. That could be a combination of state and federal capital gains. The big one, if you’ve owned your property for a very long time, could be depreciation recapture tax. As you just mentioned on the intro here, a lot of people are concerned about that tax, especially in today’s world, as potential taxes are continuing to rise, or at the talk about raising capital gains. That’s very important for people to continue to build their wealth, and that’s across the board. It’s not just for the ultra high net worth investors. It’s your everyday investor that can utilize the 1031 exchange. The DST, mechanically, when you sell your property, your money goes into an accommodation, a third-party, or a qualified intermediary, and they hold your funds. That’s where you then choose what to invest in. You can go invest in your own single family house, you could go buy a commercial property, or you can consider what we do, which is the DST structure. But again, there’s real estate inside of our DST structure, which we can dig into that here in a moment. But mechanically, 1031 and the DST 1031, all have the same rules. There’s not much difference there from that regard.

Deidre Woollard: It sounds like people can use DSTs individually for properties, but then they could also use them as part of syndicated investment and fractional ownership?

Chay Lapin: Correct. That’s the biggest difference to wrap up your previous question there, is the DST structure really allows for people to be a fractional ownership through that 1031 exchange mechanism. Your typical crowdfunding investment, or your LLC, or your general partnership, or even RITS that exists out there, those can be all great investment vehicles, but those are utilized for cash investments. Those are after tax dollars, or through your IRAs, or retirement accounts that you guys or investors are investing through, but you can’t sell your 12-unit apartment building, or your commercial property and exchanged into an LLC most of the time. The DST structure, again, is just a wrapper around that real estate that allows people to be a fractional owner. But more importantly, outside of the fractional ownership, especially in today’s market, if you sell something for a couple of million dollars, and you want to get into some quality property. It’s competitive out there to find something. It’s very difficult, even at those price points. You might be getting into something very risky or value add, and a lot of investors are at a point in their life where they want potential stability rather than taking a lot of risks. They already did that their entire investment career up to this point. So it allows investors to maybe get into some higher quality institutionalized real estate, whether that’s an Amazon distribution center, 500-unit apartment building, stuff that you and I would want to be able to do on our own. Then secondly, diversify. Not over-concentrate your two million, 10 million, $20 million into one asset, which I think has proven to work well over this past year and a half that we’ve all experienced of not being over-concentrated in one investment strategy, or vehicle.

Deidre Woollard: Interesting, because through our Mogul premium service, we’ve had crowdfunding investment. Recently, it sold a little ahead of schedule. One of the questions we got from our membership was, what do we do with this money? Can we 1031 exchange it? How do we avoid taxes? In a situation like that, can people take their money from something like that, and then put it into a DST?

Chay Lapin: Typically, no. If I understood your question, if you are involved in some fund over here and then there’s a liquidity event a year later, two years later or whatever the time schedule is there. The fund, itself, in some cases, can do a 1031 exchange internally and defer the taxes for the entire fund dependent upon the structure. But the investors can’t branch out on their own. If the total liquidity event where the fund distributes all that capital back to investors, unfortunately, you cannot defer through a 1031 exchange in most cases. Now there may be opportunity zones and other investment vehicles and I’m sure you explore on your podcast here, but for our stuff, it’s got to be real estate to real estate, not part of another syndication. Sorry to make this long-winded. But if a DST syndication sales in five-years from now, those investors, because of the way it’s structured, can do a 1031 exchange and they could do a 1031 exchange into another set of DSTs. Or they could decide at that point in time, “Hey, I want to go out and buy this property that I saw down the road.” and do their own personal exchange. It gives them that flexibility on that liquidity events.

Deidre Woollard: Interesting. You can go from DST to DST, or you can go from DST to a traditional 1031.

Chay Lapin: Exactly. Then a little more sophistication here. There has been a lot of sponsors that have come onto our platform and our industry that are very large institutions that also have other verticals in their company. For instance, REITS or non-traded REITS. We’re starting to see, in some cases, certain DSTs have a business plan to do a 721 exchange or an up REIT into that particular sponsors’ REIT. We do have investors sometimes approach us. “Hey, I want to get involved in REITS.” Because that’s the common. No one knows what a DST is. They know what a REIT is, and they want to be passive, and they want to be a fractional owner. There could be some estate planning purposes for going into the REIT and other potential benefits. In those cases, we can tailor an investor’s strategy to be involved in DSTs that are ultimately going to, they call it a 721 exchange, but it’s very similar to a 1031 exchange where it moves into that REIT. Now you have operating shares in that big institutionalized REIT.

Deidre Woollard: Would that be a privately traded REIT or a non- traded REIT? What would that be?

Chay Lapin: Honestly, it’s across-the-board. It could be public, it could be non-traded, privately. There’s pros and cons to all those different and those are definitely high level that you want to really, as an investor, understand the pros and cons and talk with your CPA to understand the consequences of moving into the REIT versus just doing a traditional 1031 exchange. I would say 90 percent of people at this point continued to do a 1031 exchange and defer that tax. Because once you move into the REIT, you can never do a 1031 exchange again. If you liquidate your shares or there’s a liquidity event, you will have a taxable event outside of if the step-up in basis still exists. Your heirs will get a step-up in the REIT. But outside of that, if you want to access to your capital for whatever reason, you’re going to have a taxable event.

Deidre Woollard: Interesting because I think one of the things that investors don’t really understand sometimes is that idea that the 1031 exchange is this chain that you can keep doing really for the rest of your life. But once you break that chain then you would have to start a new chain essentially.

Chay Lapin: There’s big consequences if you’ve owned your property for a long time and it has appreciated significantly and not just from the capital gains, but as I mentioned before, that depreciation recapture sometimes could be equally or as large as the capital gains. We’ve seen some investors come to us and they’ve spoke to their CPAs and they’re looking at us 50-plus percent consequence if they don’t exchange. The 1031 exchange really is an amazing tool to build wealth for everybody. Our vehicle is for accredited investors, but the 1031 exchanges itself, you could sell a $10,000 house and do a 1031 exchange and slowly build up your wealth. In fact, a lot of our investors that are at that retirement age in their seventies, eighties, that’s how they started. They have their five to $10 million now, but they started buying that $50,000 house or $100,000 for flex and utilize that 1031 exchange to slowly build out potential wealth for them.

Deidre Woollard: Interesting. You mentioned that you have to be an accredited investor on your platform. Do you have to be an accredited investor to use DSTs?

Chay Lapin: Correct. Right now, there are some structures out there which I’m sure you’re aware of where you could take non-accredited, but it hasn’t really bled into our industry yet. We do hope that it does, or maybe the accreditation rules are adjusted in the future to give more flexibility for sophisticated investors that might not be “accredited at this point.” But currently, everything that I’ve ever seen in our industry has been for accredited investors within the DST world.

Deidre Woollard: Makes sense. What is the average minimum investment? Or what are you seeing on your platform?

Chay Lapin: The minimum investments for most DSTs are $100,000 which is nice. That is flexible. Sometimes we do have high net-worth. There’s a lot of wealth. I don’t even know how much, probably in the trillions of single-family homeowners investment properties that are part of that baby boomer era. They own a ton of the real estate here and we’re starting to see those liquidate. Obviously homes in certain areas of the country could be less than a $100,000. We can wave that minimum investment for investors. I do believe the minimum investment is there just so that one DST doesn’t have 10,000 investors. It creates a more manageable experience for the sponsor. Then on the other side, the reason why the minimums are lower, these might be 30 million, 100, $200 million buildings and have a minimum investment of $100,000. Also gives access, which we’ve seen a big popularity in to cash investors. Just as someone may invest cash into a REIT or various funds out there, which are all great strategies. We’re seeing investors invest in DSTs from a cash standpoint. One of the reasons I believe I have seen that is because if you come in as a cash investor today, when it sells that liquidity event, you can then do the 1031 exchange. Also it acts and feels like real estate. You’re getting all of those potential benefits of ownership as a cash investor on your schedule E, just as if you owned real estate. There’s potentially more tax shelters for that income to shelter there.

Deidre Woollard: What investors are right for this? It sounds like for people who are retiring, that that might be a good place for them. Also, it sounds like maybe people who have a cash event, maybe they cash in-stocks or something like that. What investors are you seeing that are using DSTs?

Chay Lapin: Yes. Historically in our space, a large amount of the investors have been retirees or close to retirement, 50-plus years old. That primarily up until about three to five years ago, was the investor rarely did we see someone on the younger end of the spectrum. That’s probably because if you’re younger, you might have that time or that patience to be hands-on. When you’re at your first real estate investment, it’s nice to control it. It’s hard to make that first step of, here’s my a $100,000. But over the last five years, I think what has given people comfort, maybe in those younger generation or younger professionals is crowdfunding. We’re not a crowdfunding, but in a lot of respects, we’re very similar. We have a platform. We’re just not necessarily designated as a crowdfunding site or company. But the crowdfunding sites that are out there have really targeted the younger professionals. They have allowed those people to learn about crowdfunding, learn about fractional ownership, which has then bled into our industry. I think the biggest thing is a lot of young professionals that are credited investors in today’s world, they are a lot of cases entrepreneurial. They have their hands and know capacity outside of what they’re building, their entrepreneurial experience. There’s a lot of capital and wealth that’s been built within those different entrepreneurial verticals that these DSTs have allowed those working professionals to get their money or their capital working within the real estate sector, just as if they were to go and buy a 10-unit apartment building.

Deidre Woollard: I agree that the 1031 exchange has always been a great way for people to build wealth. We talked about it a lot on this podcast and on our site. There are concerns though, about the Biden administration updating the 1031 exchange rules, changing different parts of it, would that impact DSTs at all?

Chay Lapin: From a high level, it’s going to impact us in some respects, the same way it’s going to impact the rest of the world. That would be, do they take away the 1031 exchange or do they restrict it? But in the long run, really, from what we’ve seen, and full disclosure, no one really knows what direction the administration is going to go. We’re all making educated guesses here. There’s been people inside the administration or that have floated different ideas out there, pre-administration and current, as they’ve become the administration. One of the main things that we’ve seen float around is not really necessarily taking away the 1031 exchange, but either restricting the 1031 exchange in some capacity or restricting it for a certain income earners and that we’ve seen anywhere from $400,000 ordinary income upwards to a million-plus income that would be restricted in some ways. I believe there has been some floating around of how much tax you can defer a year through the 1031. I think that’s more of the recent one similar to the primary residents. How you can, if you’re married, you could differ $500,000 of your gain when you sell. It sounds like they were going down that road with the 1031. Now fast-forward into our space, that might inhibit us immediately. Because we’re not going to get the five-million-dollar exchanges. People are going to hold onto their real estate. They’re not going to pay the taxes. That will freeze transactions as we all probably know. But what I could see happening in the DST space is if they do restrict, and they say, “Oh, you can only differ $500,000, for example, a year.” Why would you go out as a real estate investor and buy a $2 million building and take the chance that in 10 years from now that’s going to have more than $500,000 gain? Why not take your $2 million and diversify it across different DSTs? It could happen, but the chances of them all selling in the same year is going to be low. You might insulate yourself on how much capital gain you are going to have each year, and maybe you only invest 250 or $500,000 max in each DSTs so that you know those. If they do hit a home run, and they have more than $500,000 of gains, then so be it. But that’s where we see our space going if they were to do that. I think that would be very beneficial for our world.

Deidre Woollard: That sounds like a smart strategy. All right, let’s take a quick break here.

Deidre Woollard: I’m back with Chay Lapin, and we’re talking about DSTs and 1031 exchanges. Let’s talk about the properties on the K Properties website. I noticed there’s a wide variety across different sectors. Is that for like-kind exchanges, or why is it in different sectors? Is it diversification?

Chay Lapin: One of the biggest potential pros of the DST structure is diversification and there’s different diversification strategies. There’s asset class diversification, there’s geographic diversification. Even within certain asset classes there’s like multifamily, you could be in a Class A, or you could be in an ultra value-add situation, or you want to be in tertiary markets or primary markets. The DST on our platform with all the different sponsors that we utilize, they all focus on different or have specializations in different areas of the country or different asset classes. I would say the core stuff that you’ll see out there more frequently are going to be your D plus, A Plus multifamily. That’s a big sector on our platform. Medical buildings, typically medical buildings with large tenants. These are Fortune 500-type tenants. They are very large regional operators. They’re not your one-off doctor’s office or anything along those lines. Industrial and self-storage has become a big sector across, I think in the entire real estate world for obvious reasons. We’ve done a lot of that. Then lastly, net lease properties. Your typical whether it’s fast food or CVSs of the world. The triple-net leases, which most people referred to them as.

Deidre Woollard: Excellent. Are they mostly core stabilized? Is there any value-add or opportunistic on there?

Chay Lapin: For most of our investors 90 percent of the time, as I mentioned before, they’re looking for stability. Although there is risk in all of the deals, no deal is perfect. But most of these on paper are considered to be somewhere on the fairway where there might be some multi-family with some potential, maybe a B, where it’s maybe ’90s vintage class A or early 2000s where it needs a little updating, but they’re not going in and wiping out all the tenants and restructuring the whole building. So I call that more of a stabilized value add approach. But these are cash-flowing assets day one. Rents can go up and down. I think that there could be sponsors as this space evolves and as the spectrum of investors are coming to the table. Because as I mentioned, we’re getting a lot more younger people who maybe have a higher risk profile. Maybe there will be some stuff in the future that has more of that value add play.

Deidre Woollard: Interesting. So you’re not dealing with things like tax losses because you’re redeveloping and there’s no tenant base or something like that.

Chay Lapin: Now, we have funds outside. We do have capital real estate funds that might have more of that, but that’s not for the DST structure. The closest thing that I’ve seen in that is sometimes a brand new construction building may have some tax benefit to it. There was a recent offering where it was the first four years, there was no property tax because the developer that originally developed it had some incentive to develop there from the city. Stuff like that but very light. This vehicle really is utilized to, again, defer that capital gain and continue to cash flow along the way, potentially.

Deidre Woollard: That makes sense. In real estate crowdfunding and the deals that I’ve seen on those platforms, they’re usually LPs, limited partners, or you see fractionals that are in LLCs. How is that different than the DST structure?

Chay Lapin: Yeah. The DST structure, in some respects I like to compare it to a family living trust. I have a family trust and my real estate is inside my trust. If I went and pulled title on my home or an investment property, it would show at the city that Chay’s family living trust owns that asset. So I, as Chay, am not the owner, but I’m a beneficial owner of my trust. It’s a pass-through entity. The DST structure is very similar where you go say it’s an Amazon distribution center, you go pull title on that asset and it’s the DST, you’re going to see the entity of that DST, and then they’re depending upon how many investors there are. But let’s say there’s 40 undivided interest. There may be someone owns 10 percent, someone owns 12, there’s no GP or LP structure. Everybody has an undivided interest, no one has more power than the other, but the sponsor is the trustee of that. It’d be like if I had my family trust and I asked you to be my trustee so you make all the decisions, but I’m the owner of the properties. Same concept. The sponsor makes those day-to-day decisions, that’s why it’s a passive investment, and that’s what a lot of people are looking for when they’re investing in this. But ultimately it’s everything from net operating income to potential appreciation; there’s no waterfalls. That’s, I think, the biggest thing on the backend, is there’s no preferred return or waterfall structure. That’s why the IRS had blessed it as kind because it doesn’t feel or act like a general partnership, if that makes sense.

Deidre Woollard: That doesn’t make sense and that’s a big difference between a lot of the crowdfunding deals that we’ve seen that have that structure.

Chay Lapin: Correct. I do like to say it’s not that the crowdfunding types of investments are bad by any means, it’s just a different strategy in our world.

Deidre Woollard: Exactly. In terms of communication, one of the things that we think about with real estate crowdfunding is you get a lot of communication from the sponsors, you get updates on things like that. What communication inside the DST does that sponsored trustee have with the investors?

Chay Lapin: There’s a couple layers there. Our firm, we do have an investor relations team that acts as the interface for investors. We’ve done exchanges up worth of $50 million-$100 million and they are diversifying across 20, 30 deals, and that might be across 10, 15 different sponsors. At K Properties, we do have a team here that investors can utilize, get updates on their projects, but from a sponsor’s responsibility, depending upon the type of asset. If it’s a multi-family deal, there’s probably going to be more frequent updates. Some cases on a monthly basis, if not at least on a quarterly basis where Joe moved in, Sally moved out, and we paid all these bills, this deferred maintenance issue came up. You get full transparency there. If it’s something like an Amazon, you’re probably just going to get a quarterly report unless something comes up that would need to be communicated to the investors. Then with all that said, with technology in today’s world, we’re seeing all the sponsors create portals and things like that so investors can just log in and get live updates. It’s very, in my opinion, transparent, accessible, through not only our firm but the different sponsors we work with.

Deidre Woollard: Awesome. Looking at the properties on your website, you’ve got interest in a lot of the same sectors that we recommend and invest in when we’re talking about REITs. You mentioned multi-family, essential service shopping centers, those triple-net leased properties, healthcare. Is there any sector that you’re seeing putting more time and investment into and what are you seeing on a geographic basis as well?

Chay Lapin: Geographically, it’s all the same that you’re hearing out in the media, that the Southeast, that Sunbelt, that Texas through Florida up through the Carolinas. It’s not to say we don’t have other stuff throughout the country, but that’s really where everybody at our level professionally has seen growth and still potential growth in those markets. Some markets, the Dallas of the world, are starting to get pretty frothy out there and it’s harder to find assets, or Austin. But the Southeast, I think, is where about 80 percent of what we do even pre this expansion that’s taking place. You came in our industry 15 years ago, they were targeting that. I think that’s why DSTs, fortunately, did really well through this coronavirus because by default most of the investments are in the Southeast. A lot of those areas didn’t shut down fully or they had different waves of shutdowns, so it allowed those economies to be a little bit more stable potentially than maybe Los Angeles or something. Then in terms of what’s popular out there, a lot of investors and stability in that B-plus A multi-family, our rent collections across-the-board, and we probably are actively invested in ten plus billion dollars of multi-family with our investors. The rent collections were 90 plus percent across those B plus A where nationally, I think at one point some agency release that there was only like a 70 percent rent collection or 74 or something along those lines. I think that there is a flight to quality within those class A or B plus assets in the multifamily sector. Then your traditional long-term net leases, just like we saw in the recession and 08, as long as your company then go bankrupt, you had no cash flow interruptions. The key there is targeting investment-grade tenants. Don’t go for Bob’s hamburger and try to get a eight cap then there are the first to go. When a correction happens. We’ve seen a flight to quality and that, like I said, that multifamily and a flight to quality, long-term investment-grade tenants. Then lastly, as I mentioned, that industrial type property and self-storage has been become quite popular over the last two to three years.

Deidre Woollard: Yeah, incredibly so how are you getting assets and sponsors onto your platform?

Chay Lapin: Our founder Dwight Kay, really was one of the first groups to create a company that this is the focus, the DST structure. A lot of people that do the DSTs, they might have a couple of sponsors, but it’s more financial planning or investment advisors. Not say that that’s bad, but because of their focus there doing all sorts of financial vehicles, they may only have a certain amount of man and woman power to get out there and talk to sponsors and get access to deals. Where Dwight Kay, our founder, because of our specialization, this is all we focused on. We ultimately review almost every single DST for many institution that comes out and really we get approached at this point because we are one of the largest equity raisers in the space, I think this year raised a little over $0.5 billion of equity through our platform. Last year, we were close to 1.5 billion, we were 430 or 50 or something along those lines. We’re fortunate to at least get a stab at reviewing it. It doesn’t mean we approve everything, but we get a stab at getting access to the deals for our investors.

Deidre Woollard: Let’s talk a little bit about that approval process. What is your due diligence process look like?

Chay Lapin: Yeah. There’s different layers of due diligence. Obviously the sponsor, they are buying that property and they’re doing all of their due diligence. If there is a loan on the property, they’re putting their name on that loan and that’s one of the nice things that we didn’t hit on here with the DST structure is if an investor wants debt for tax purposes or they need debt because sometimes in a 1031 exchange you’d need to replace debt. The DSTs have non-recourse financing on them. Obviously your principal investments is at risk, you could lose that, but you don’t have to sign on the loan that marks the sponsor is. You don’t have to go through the lengthy process of getting approved for the loan because the sponsor already originated that loan on the property. It really creates a neat vehicle for debt. But to get back to your question, due diligence, sponsors doing a-z, they ultimately submit a package to us. This is everything we did. The nice thing is we get to see it all upfront. When you are buying your own property and you’re on a tight time-frame, it may take you four weeks to get an environmental report or property condition report. You may be up against the wall and having to make a tough decision without getting all your due diligence. We get all that because the sponsor did it. Then we have a staff here outside of all of our executives here that do have experience. We have a dedicated staff that goes through all the third-party reports, goes through market data. We actually send somebody out to all the assets and we’ll provide that report to our investors. Because sometimes it’s nice to see the iPhone pictures of a building rather than the glossy brochures. You can make anything to look good. Not that a building that’s not as pretty is bad, but investors I think appreciate that. Then lastly, I think that if you have the capabilities and the time, we always encourage investors that we’ll take them out on property tours. That may be difficult if you’re having to travel in today’s world across the United States. But that’s kind of the process. Then why does the deal get not approved? It could be an asset class that we’re just not comfortable with. There are some very respectable sponsors that we work with. But if they come out, and this sounds obvious today, but this was our strategy five-years ago with the hotel deal. We just don’t touch hotels. We also don’t touch senior care, assisted living. That’s mainly because assisted living has a large litigation risk. Most of the times there are smaller operations. There is very few big national operators, so you don’t have that credit quality on the lease. We’ve just seen a lot of those lose money now from a development standpoint, or maybe in a REIT or a fund where your ultra diversified, the assisted living care may make sense. But as a class rejection is a big one on ours, and then how is the deal structured, and that is primarily in a lot of cases tied to the financing. Does it have short-term financing? What’s the debt coverage ratios? All the above.

Deidre Woollard: I want to go back to a term you mentioned before because I think it’s important for people to understand which is non-recourse financing. Can you explain exactly what that means?

Chay Lapin: Yeah. Non-recourse financing ultimately means that the bank can’t come after you outside of your investments. If for whatever reason they’re going to do a foreclosure and it was a $50 million building and selling worth $10 million, so the banks not even going to be able to collect their money, if there was recourse financing on that, you might have had to collateralize your primary residence or other investment properties, and these it’s a 100 percent non-recourse. Any carve outs that are required. Sometimes banks might have a carve-out, they call it where it might be like an environmental carve-out or a bad boy act carve-out, which typically means if you don’t pay the mortgage, who do we go after? The sponsor signs those carve-outs. Even the little exposure there is the sponsor is taking all that risk, that institution. Again, to wrap it up, the non-recourse financing really is defined that only your money is at risk that you invested.

Deidre Woollard: Great, thank you. You mentioned tours earlier. What else is involved in your education process for investors?

Chay Lapin: Education is huge, we put a lot of effort into education over the years from providing tons of resources now, all digitally done, on our website, great blocks, case studies. We really encouraged, it’s been difficult over this last year, I used to travel prior to corona virus almost every week to meet with investors across the country. We’re fortunate to have offices throughout the country. It’s really made it accessible for investors to get in front of one of our representatives. We can literally probably get to anybody within a two hour range from all of our offices across the country. Just your education of DST, it’s a new structure. All the ins and out a lot of what we discussed. That’s one whole segment that usually takes a good amount of time to get someone comfortable with. Then number 2 then it’s diving into that real estate. Because at the end of the day, although you’re investing in the DST, you’re really investing in the underlying real estate. We have been very lucky, and I don’t know if that’s the right term, but fortunate to have a great team behind us from all different sectors of real estate in our team with 30-plus years that she worked at different real estate firms and Jason Salmon. That experience that we compile together, again, I think what sets us apart because a lot of people that offer DSTs outside of the sponsors, they’re obviously educated but the sponsors not interfacing with the client, it’s the advisor. We are truly a real estate backed in advisory firm or not. I could sell you stocks, but I wouldn’t be the right person to do that.

Deidre Woollard: How long are the types of holds on these investments and what returns are people seeing?

Chay Lapin: I would say they all range between a 5-10-year hold for disclosure that the sponsor does have the flexibility if they want to hold something longer for X reason, they do have that ability or vice versa. If they want to sell for a particular reason that was earlier, maybe in year four when we thought that it was going to be a seven-year, hold period, they can do that. But typically, I think there was a consulting in agency that looked at all of it, a couple of years ago, all the DSTs that went full cycle or had a liquidity event, the average hold period was around like a five to seven-year hold period. They range just like any real estate investing strategy or asset class. There’s from a cash flow perspective and cash flows, like I said, could go up and down dependent upon the tenants, but those could be anywhere from 4-7 percent cash flows dependent upon the real estate and then the overall IRRs. That’s a big range as well, but I think on average, 8-20 percent. Those higher ones, we’ve definitely seen higher IRRs in today’s market, but i don’t always like to quote those because I think we’re obviously at a unique place that I don’t know that it’s going to sustain that going forward. I think right now what’s important for investors is putting themselves in a defensive position and that’s not chasing yield. It’s not chasing the big ”IRRs”. None of us know what’s going to happen in 5-7 years, no one even knew that this was going to happen or what’s happening today and diversification, that’s what you need to do in our opinion when we’re out there kind of 07 moments. What’s going to happen?

Deidre Woollard: Yes, I do think we are in this moment. Those are some impressive cash flows though. We’re in this weird moment. Last year, deal flow seem to stop across a lot of different platforms this year has been crazy on the right side, we’ve had joint ventures, mergers, acquisitions, all kinds of stuff happening. How active is the deal flow on your side?

Chay Lapin: It’s pretty active. At any given time, probably in whole DST world, we stay pretty close with some consulting firms that measure out the different or some private firms that work just within our space with the advisory firms and there’s probably around 40-60 offerings at any given time right now. On our platform, once we go through those approvals, not approvals, we are averaging maybe around plus or minus 40 offerings and that’s across 30-plus sponsors. I think sponsors in today’s world are having, just like all of us, you are having a hard time keeping inventory. The market is moving so fast, you bring out, I’ve seen a $100 million equity raises be gone in a month where two years ago it would have taken 3-6 months to raise that capital and then in terms of the growth in our industry and that potential growth in different, I was listening to your podcast on crowdfunding and she was mentioning the different institutions that are shifting to retail investors and that’s happening in our world too, the big institutions are eyeing the DST world and they are eyeing that world for what I brought up earlier, that all the big institutions, the REITs are the big thing right now. Growing their REITs, growing their assets under management. With DSTs, you can bring that capital into REITs and so some of the bigger players, the bigger institutions, they realize, “We can get access to retail, fast capital.” Fast capitals is 1031 exchange funds. You have to make a move. If you’re cash investor, you don’t have to make a move, right? You can be more patient with your investments and so I think our industry, outside of uncontrollable events, it’s going to continue to substantially grow.

Deidre Woollard: Last question for you Chay, you’ve got a past as an Olympic athlete. We’ve seen so many professional athletes become really smart real estate investors from Roger Staubach back in the day to Emmitt Smith, Alex Rodriguez. What lessons do you think from elite sports translate to real estate investing?

Chay Lapin: The reason I got exposed to real estate was because of my sports experiences and one of the things is I played Water Polo. That’s what I went through the Olympics for and unfortunately in our world, we don’t make millions of dollars. We actually lose money by playing the sport. We don’t make any money and so you had to be creative. If you weren’t in college, in order to train and to live and to feed yourself, you had to be creative and real estate provided that for me. I was lucky to have some great mentors that I sit through college. I actually got into real estate and that got a job. I got my licenses in college because I had a great mentor on the Olympic team when I was in college. They went to Stanford and he had pulled me aside at one point and was like, “Hey, don’t get stuck in the sports world, don’t retire at 35, 40 years old playing professional sports and not have anything to do.” That kind of put a lightbulb in my head and I seeked out different industries that would give me flexibility to play my sport and achieve my goals. Which is that discipline obviously carries over into the real estate world and being able to manage the capacity that we operate at. But really, that’s how I was exposed. I worked my entire Water Polo career in some capacity and that really has played into some of the expertise I have today because I took jobs as little as being an onsite property manager so that I could have free housing while I trained and so I learned interacting with tenants, all the maintenance, all the property management, then went to asset management, then went to brokerage, then went to syndication. It really gave me a really good base to be at the level I’m at right now. I’m very fortunate to be at a company and lead a company that has the size we are at the age I am but all that experience that I gained is ultimately book gotten here.

Deidre Woollard: Fascinating. Well, thank you so much for your time. This was great. Reminder to listeners, you can learn more on checkout properties at www.kpi1031.com. You can always email us at media@millionacres.com to share your thoughts. Stay well and stay invested.

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