Sponsor Stories Podcast Number 1 – DST 1031 Exchange Podcast

Welcome to Sponsor Stories with Kay Properties – An In Depth Look at the over 25 DST Sponsor Companies that investors have access to on the kpi1031.com marketplace.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

Betty Friant, Senior Vice President – Kay Properties and Investments:  Before we get into that portion of the question, answer portion of our call with our Sponsor Stories series, I’m going to follow up with a little bit of an overview on our Kay properties. 

Some of the people on the call are current clients. 

Others are brand new to DST and to Kay properties. 

So Kay Properties is a national Delaware Statutory Trust DST firm. Our website is www.kpi1031.com and our platform there really provides access to the full marketplace of DST from over twenty-five different DST sponsor company. We also have custom DSTs that are available only to our Kay clients and we offer independent advice on the various DST sponsor companies with a full due diligence and vetting process on not only the sponsors but also on each property on our platform. 

At any given time, we might have between 20 and 40 DSTs on the market and as a matter of our regular due diligence process, we actually go and visit each one of those properties, even if it’s a portfolio that might have 20 or 25 different properties within the one DST. We also have a secondary market that has been established and so we can get you more information about that if anyone’s interested in hearing more about the secondary market at Kay Properties our team members collectively have over a hundred and fifteen years of real estate experience and we are all licensed in all 50 states and have participated in over fifteen billion dollars worth of 1031 DST Investment. We’re pleased today to have Louis Rogers. 

As I mentioned, he’s the founder and CEO of Capital Square with us today talking about their philosophy and their business model. So welcome to the show, Louis. 

Louis Rogers, CEO – Capital Square CS1031: Thank you Betty. It’s a pleasure to be with you. 

Betty Friant:  Some people listening probably don’t know that much about DST and about 1031 exchanges. So I was hoping you would give us a brief overview of what a DST is and then a quick summary of what a 1031 exchange is to get us started. 

Louis Rogers: Absolutely the DST is a DELAWARE statutory trust that’s a legal entity formed in Delaware. And since 2004, the IRS has ruled that a Delaware statutory trust is like kind real estate. And that ties us into your question about section 1031. Section ten thirty one is my favorite section of the Internal Revenue Code. It’s been in there since nineteen twenty one and it allows those of us who have investment or business real estate to defer the tax when we transfer or sell the property. And so it’s a tax strategy, it provides for deferral. It’s kind of interesting when you structure an exchange or tax basis carries over from you relinquish to your replacement property taxes deferred and deferred until you sell that replacement property and it’s within your power not to sell the replacement property, but to exchange it and to exchange it and to exchange it over and over and over again in a series of transactions we call do you know, we call it very good. 

Betty Friant:  I do. But I’ll let you give the punch line there. 

Louis Rogers: It’s Corny. We call it swap till you drop. If you exchange throughout your lifetime, you’re building up wealth for your generation, your kids, your grandkids. And then when you meet your maker, your heirs receive a stepped up basis. They can sell the property. And typically, the tax is forgiven. So it’s deferral, but it’s deferral for as long as you want it to be. You can build that family wealth over generations, decades. And then your heirs can receive a step up and the tax can go away. It’s a magical thing. You can read Section 1031. You can Google it. And it’s written in real simple English from nineteen twenty one back when the code was one little volume because it was a long time ago. 

Betty Friant:  And just is really this is a bit of a background of DST is where you actually own a piece of real estate instead of earning the whole property. So it gives you the chance to not put your whole 1031 exchange or all your investment dollars into one property, but to be able to diversify across different asset classes, different tenants, different geography, even different sponsors that will be going through today. So can you give us a little background on what a DST sponsor is and how that works? 

Louis Rogers:  Yes, my firm, Capital Square 1031, is a DST sponsor. There are a dozen or so firms throughout the country. Our mission as sponsors is to find the very best real estate that qualifies for Section 1031. That basically means real property can be apartments, can be medical, can be industrial, can be retail, can be any asset class. Put it into the Delaware statutory trust structure and that’s the sponsors function is to source find the property, conduct the due diligence, negotiate for loans. In 1031, if you had debt on your relinquished property, you must have debt on your replacement property. And so many of the programs are leverage. Some are all cash, conduct due diligence, close on the property, put it in the DST in the right way to provide a tax opinion to every investor that qualifies and then as a sponsor to manage the property throughout the holding period, carry out the business plan, whatever it might be typically to manage the property, to raise the income, and someday to sell the property in return. Return the investment with a profit. That’s the sponsors function. 

Betty Friant:  How did you get started as a DST sponsor? 

Louis Rogers:  I was a little boy in Smithfield, Virginia, and my dad was a veterinarian and he said, you’re not so good in math, so you’re not going to be a veterinarian. Maybe you should be a DST sponsor because you have a big heart. But seriously, I’m a lawyer by training and most of my clients were sponsors in the back in the day. I had 20 clients who were sponsors. And so I learned the legal side by doing their documentation, their documents, their real estate closings, their offering documents, and then over time made the transition to becoming a sponsor, starting as on the legal side and then on the business side. And nowadays, the net is so long. I think we’ve learned all the sides. 

Betty Friant: I think you have. Well, from your perspective. Where does Kay properties fit into your business model? And when you’re thinking about our team here at Kay properties, how does it work with us together? 

L: Sure. It fits hand in glove. We’re out there sourcing properties with a strategy, but we don’t know the investors. We don’t know their tax requirements, their financial desires. We don’t know their planning goals. And so the people at Kay Properties know the investors. They understand what the investors are trying to accomplish. And you’re able to source the real estate from Capital Square and other sponsors. So we’ve put together it’s not a legal partnership, but it’s very much a partnership. We’re helping you find the right properties for your investors. Sometimes it’s a capital square property. Sometimes it’s another property. But together, we’re able to do a better job, accomplish the investors mission, defer the tax, invest long term in stable strategies that have nice income and profit potential. 

Betty Friant: We do that together and that makes sense. So you started to talk about the different asset classes and the different types of property that you and other sponsors do. What are the types you really focus on at Capital Square and is there a geographic area of the country that you’re mainly involved with? 

L: Great question. Two major asset classes in our shop, multifamily apartments. We’re very bullish on apartments. And we like class-B apartments in the Southeast apartments because they’re a necessity of life. You have to have a roof over your head, the apartments, because the rent is relatively low, affordable. We’re able to negotiate with the agencies. Fannie Mae, for example, financed our properties. Today. We closed on a batch of properties at 3.3, 8 percent fixed. And that’s because Fannie Mae is able to finance them. That’s their mission is to finance housing. And the beauty of the B is that rents go up on average 3 percent a year organically, just in the normal course of things. And in the B apartments, we can add value, we can upgrade the kitchens, the bathrooms, put in laminate flooring and do things to raise the rent and add value. And so the apartments, because they’re affordable southeast because of job growth. We’re headquartered in Richmond, Virginia, not too far from Betty. And we’re very bullish through the mid-Atlantic, Maryland, through D.C. Virginia, the Carolinas, Georgia, Texas and Florida. The bulk of the country’s job growth is coming in those areas and there’s a transfer of big companies moving into secondary and tertiary markets like Richmond. A company called Costar filled their second headquarters here in Richmond. Seven hundred first time job college graduates making sixty thousand a year moved to Richmond and they can afford to pay good rent. And that is an occurrence across the Southeast. Big companies moving to smaller cities with educated workforce, lower cost of living, a very happy life. Not so much traffic, not so much stress, technologically oriented. So multifamily is a growth engine. Every year we can raise the rent. And every year we can add value somewhere in the community to add additional value and growth. The net operating income and we have lower expenses because of the Fannie Mae agency financing 3.3 percent is phenomenal. And it’s a necessity of life. The fees are affordable. And so in good times, they’re full. Ninety four, five, six percent. In bad times, they’re full. Ninety four, five, six percent. They stay full. They are somewhat recession resistant because the cost is low. Sure, you can move into a house. But the millennials are not moving so quickly. They’re deferring their move into a home. And we have empty nesters that are selling their big homes and mourning an apartment. And maybe they have a river house or a beach house, but very bullish on the apartment across the southeast. 

Betty Friant: That’s not all you do though. I like that answer, but I know you do offer some other asset classes. It’s just great. 

Louis Rogers: We do. We do. We really like medical real estate because no one on this call is getting any younger. We all unfortunately will need more medical care in the future. And it’s not. Medical care is not correlated to the economy the same way that retail properties are correlated. And so in good or bad times, people will seek medical care and medical office building, surgical centers, rehab centers, dialysis centers. Those things are typically 100 percent occupied for a long term, 15 years. They’re different than the apartments. The apartments are gross leases where the ownership pays the taxes, insurance, maintenance and repairs. So it’s a little more complicated. But the medical are net leases. The tenant pays the taxes, insurance, maintenance and repairs. And so when there’s inflation, the tenants will bear that cost of ownership will bear the cost of the increased expenses. The medical tenants tend to be large where the apartment residents tend to be mom and pop. And so it’s a different parameter, more investment grade properties, more institutional properties. Some of the tenants are on the New York Stock Exchange or very large medical groups. Long term triple net leases. Very predictable. And so the apartments are a big growth engine and the medical net leases are more of an income, stable, predictable income play. And the beauty of the DST, one of the beauties of Kay properties, is you have so many different options for your investors that you can build a diversified portfolio that’s just for that client. And if they want a little more growth in a certain market in the country, you have it and you can add more growth if they want more income. You can add more income. If they want more leverage, you can add more leverage. If they want more cash, you can add for all cash because you have all the top tier sponsors available to you in a way that most groups do not. Yes that makes sense. 

Betty Friant: It does make sense. It really does. But back to your properties. I know that the market is just so competitive these days where we are in the real estate cycle. How do you choose properties? How do you find them? How many do you look at before you buy from and just take a profit? 

Louis Rogers: That gives me a headache because it’s 101. We’ll look at 100 properties to get to one. We’ve been very successful working with the same real estate brokerage groups who are looking for certainty of close capital square. We have financial resources, we have in-house lawyer and paralegal, and so we’re able to work quickly within a seller’s timeframe. It’s very, very competitive. Only one in 100 is going to work for us and we’re very fussy. The apartments have to be extremely stable and the metric for apartments is debt service coverage ratio. And we’re typically two to two and a half to one. It’s a long way of saying that our cash flow, if we lost half of our residents, we could still pay our bills. That’s how stable these properties are. And they’ve been stable for decades. The net leases are with strong operators in the medical field. And so they’re not subject to the whims of consumers. Maybe they want coffee one day, maybe they want wine in a box the next day. If you need your hip prepared, you’re going to your whatever that doctor is your orthopedic. We’ve had orthopedic practices have made really good money. So we could. We like the orthopod. 

Betty Friant: So we talked, you think, in terms of the real estate cycle. I’m guessing now that you’re looking at properties as having to look at so many properties. How does that affect or inspired them to invest in when you know that you’re in? That’s a long recovery in our real estate cycle. Our real estate market. 

Louis Rogers: It makes us very conservative. The apartments that we’re buying are ninety four, five, six, seven percent occupied with increasing rents. And under almost any scenario, they’re going to say ninety four, five, six, seven percent occupied. We’re in diversified economies with all sorts of industries and businesses. And it’s not it’s not like a one horse town. If something happened to one employer, we’d be wiped out in the real estate recession to be apartments actually maintained occupancy because they were they’re affordable and the medical office buildings didn’t lose occupancy in the real estate recession because we still needed medical care, we had insurance. Although those of us with jobs have insurance and we go see our doctors and doctor pays the rent, it stays very stable. We’re extremely conservative. We don’t buy big box retail things or any retail things for fear that they’re too volatile. We’re looking for the most. I shouldn’t say boring, stable properties we can find. But that’s what we’re looking for, properties that just perform. They stay rented. We have good tenants in the apartments. They pay their rent. They have jobs. And the medical tenants pay their rent like clockwork. 

Betty Friant: That makes sense. But we do encourage diversification. Some investors will go into many different asset classes and tenants, different geography, different planters, even different timings. But why do you think diversification is so important to investors? 

Louis Rogers: It’s the greatest way we can reduce risk. When I think back the first 1031 syndicated program I worked on was a ninety eight as a tenant in common. And in those days, investors put all their eggs in one basket. It’s corny if you research it. Even the PHD  who write the papers still say don’t put all your eggs in one basket.  Why is that Betty?

Betty Friant: You lose all your eggs. 

Louis Rogers: The best thing you can do is diversify broadly by asset class. And so apartments, medical, industrial, you name it. And then geographically. So you’re not subject to one market being hot or cold. And then by tenants, if you’re investing in Net Lease properties, not all the same tenant. And sponsor, as much as I want you to invest with Capital Square 1031, Kay properties will encourage you to diversify, to protect you from Capital Square having an issue or anyone that any sponsor, it’s just prudent to diversify. The greatest benefit of the DST after 1031 is that the minimum is very low, allowing for broad diversification. You may think you have not very much money, so you could be all the money in the world, but you can go into several properties and diversify. You couldn’t do that 20 years ago before a DST were prevalent. 

Betty Friant: It’s true. So we’ve worked with you for quite a while. And so what would you say your experiences with Kay properties have processes, people standing in the industry and why do you think so many investors choose Kay Properties to advise them on which DST sponsor wants to go to, which offerings to invest in just the whole picture? 

Louis Rogers: Sure. It’s your expertise. You focus on 1031 replacement properties. And that’s it’s not a part time job. You don’t have to ask what’s available. You know what’s available. Right. And if somebody wants a leveraged apartment community in the southeast, you know what they are. You’re looking at him all day long. That’s what you do. You’re the experts. And with that repetition comes expertise and expertise becomes efficiency. And you do so many 1031 exchanges that if an investor has an exchange issue, you know the solutions, you know the how the tax law works, you know the work arounds, you know how things close. And so you’re making it easier on your investors than if they went to somebody that might have an occasional exchange, might not know how the world works, might not know how QIs, qualified intermediaries work the whole gamut of 1031 so that the greatest thing is your expertise, your depth of knowledge. One hundred and ten years of experience. That’s a lot of experience. They dare to say there’s not a 1031 issue you haven’t addressed in your firm and work through, you know, all the sponsors, you know, all the strategies, you know, all the ins and outs. And in addition, you’re some of the nicest people I’ve ever met. You’re one of the nicest people I’ve ever met. And it’s really nice to work with nice people. 

Betty Friant:  Thank you. It’s very nice of you to say that we enjoy Capital Square as well. But, you know, one thing that I wanted that to ask you since I got you on the line here is a lot of people will consider investing in one triple net property like a dollar general, or a Wendys, or a Pizza Hut. That was my background. So a lot of people know that. And I have sold a lot of those in my lifetime. But what would be your advice for a client who was trying to decide whether to do a DST versus owning a triple net property to triple net properties are commodities, so they’re easy. 

Louis Rogers: You don’t have to manage anything. But let’s say you’re exchanging your life’s savings. I wouldn’t want to put it in one triple net property. Dollar General is good this year. Family Dollar’s good next year. Advance Auto. It’s too risky if you wouldn’t say guess wrong. Let’s say you make a bad strategy. Go in the wrong property. You could be challenged. Compare that to Betty and her team at Kay properties going out to twelve or 15 sponsors. Billions of dollars of properties all across the country. You can diversify into a portfolio that’s just perfect for your risk tolerance, your financial requirements, your need for cash flow, your desire for growth versus one triple net property in Wichita somewhere with one tenant and that one tenant has a lease. And that lease could mature and you could end up having a cinder-block dollar general in Wichita with no tenant in it. So I think for most people, first of diversifications, best thing you can do to reduce risk. And second, you will maximize your opportunities for cash flow and profit potential when they’re sold. Working with the experts on Betty’s team and you will reduce your risk again by not being concentrated in a single piece of bricks and mortar and somewhere and then having to deal with what happens if something happens, if that tenant goes bankrupt would be terrible. If the tenant went dark would be terrible. And then lastly, for 1031 purposes, if you have debt on your relinquished property, you must have equal or greater debt on your replacement property. It’s very difficult for regular folks to find debt on triple net properties like this. It’s hard to find them as well. So the kay properties and the sponsors of the world do the heavy lifting for you. Instead of having to find a property, you can look at drop boxes with properties with all of the due diligence done. You want to see the title in the survey, in the environmental report and the property condition report. And the appraisal or not, you can see it. You don’t have to see it in an afternoon. You can look at many properties of different types and parameters. You don’t have to call a real turn. Start looking and you don’t have to find the property. You don’t have to hire a lawyer. Lawyers going to want a retainer. And it is very expensive out of pocket if you’re not in the real estate business. It’s daunting. Sponsor takes that pain away and the Kay properties people make it, they sort of serve it up. On a silver platter with a blue bow around it. Who has the blue boxes? Tiffany’s. It’s like a Tiffany’s holiday present. You open it up and they’re all your wonderful DSTs Just waiting to generate cash flow and profit potential and you want to work at it. The future well served up. 

Betty Friant: Especially with the non-recourse loans. They don’t necessarily upfront and personally when you’re looking to buy a property with a debt, yes, that is true. 

Louis Rogers: We skipped over one. The funding of the properties is challenging. We’re approaching 2 billion dollars of properties and we’re buying repetitively from the same brokers and sellers. And so that’s taken a lot of the challenge out of finding properties. If you’re buying one every three to five years, it’s very difficult to try. Just a little a little separation. One thing we really like a capital square is having a third party accounting firm audit the DST. So we have 92 properties from inception from day one. Every property has had an audit every year. I think our just like Kay properties, your people. What makes you so special. At Capital Square. It’s our people. We have two thousand plus investors, maybe half in the west who have received a monthly distribution every month since we were formed. And they have properties where the mortgage payments have been made on time forever since they’ve been formed. Investor Services people to answer questions, quarterly reports annual tax package is very reliable team. And properties are selling. We’re going with what’s called the full cycle stage. And people are paying record prices for the properties that we bought three, four and five years ago. And they are bringing outstanding returns. Our equity multiple average is over one hundred and sixty two percent. So if you put in a dollar, you got back a dollar sixty two. On average, some have sold in three years. Some sold in five years. It’s been a wonderfully profitable time. 

Betty Friant: Been a good run on real estate. Just to wrap it up, what would you say would be what sets capital square apart in addition to what you’ve already mentioned, just putting the idea, the blue bow on. 

Louis Rogers: I think its because I’m the founder and CEO and started the business. We’re based on 1031. I’m a tax lawyer by training our asset managers and accountants are all zoned just like Kay properties were zoned on DST for 1031. We’re specialized, so everything we do is to make sure we’re buying good properties for 1031, we’re managing them for 1031 exchanges and we’re selling them in more 1031exchanges to continue the deferral. So our distinction is that we are 1031 all the time. 

Betty Friant: Sounds good. Well, thank you very much, Louis. This was very interesting. I know I’ve spoken to you so many times in the past, but I always learn something new every time. It was really a good snapshot of what you are at Capital Square, what you do, who you are, who your people are. And so anybody on the call is interested in hearing more about Capital Square. We’d ask you to reach out to any of us here at Kay properties and we’ll make sure that you get the information that you need and you’ll be able to review some of their properties and see if they might be a good fit for you. 

Betty Friant: We are here to help navigate the whole 1031 exchange process and bring you to not only Capital Square, but also to the various sponsors that are on the marketplace. And each of the different properties that are on the market at any given time so that our investors can really choose what properties are best for them and which strategies are best for them. What we do is actually streamline the process so that it makes it easy to move from being your own property manager, handling your own tenants, toilets and trash, and perhaps changing into a lifestyle where you don’t have to do so much of that at some point in your life. You can let somebody like Capital Square do that hard work for you. If anybody is interested, we do have references throughout the country that you can contact to see how it’s been working for other people. We have deep relationships not only with a DST sponsor companies, but also with CPA and attorneys and qualified intermediaries throughout the country so we can put you in touch with some good people. And because of the 45 days that we all live and die by basically when it’s time for the 1031 exchange, we’re available to help our clients anytime you need us, whether it’s weekends or holidays or early in the morning, late at night, so you can log in to Kay properties and see our marketplace at www.kpi1031.com or you can call Kay properties at 8 5 5 8 9 9 4 5 9 7 to speak with a licensed Kay representative. Registered representative. Who will help walk you through all your options. So, Lewis, thank you so much for being on the call today. We really appreciate your being here and appreciate your company. 

Louis Rogers: You’re very welcome. We appreciate relationship and have a great day. 

Betty Friant: Thank you very much. Stay tuned for other sponsor stories under our properties conference calls. So thank you very much. Bye Bye. 

Thanks for joining us on Sponsor Stories with Kay Properties – An In Depth Look at the over 25 DST Sponsor Companies that investors have access to on the kpi1031.com marketplace. Kay Properties is a national Delaware Statutory Trust (DST) investment firm.  The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different DST sponsor companies, custom DSTs only available to Kay clients, full due diligence and vetting on each DST property on the platform (typically 20-40 DSTs) and a DST secondary market. Tune in next week for another Sponsor Stories episode to learn and educate yourself further on all things DST and 1031 with Kay Properties.

About Kay Properties and www.kpi1031.com 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 15 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. If you are not the intended recipient of this message, any use, dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify the sender and permanently delete all copies that you may have. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 582 Market Street, Suite 300, San Francisco, CA 94104.

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