Many investors find it hard to keep the players in the DST 1031 industry straight in their minds. Who is the sponsor, the broker dealer, and the registered representative? This article seeks to answer these questions and provide a background for potential DST 1031 investors on “who is who.”
DST Real Estate Sponsor Companies
A real estate sponsor company creates the DST 1031 property for investors to be able to invest in. The creation of a DST 1031 property is a very complex process that involves many different facets.
The role of the DST sponsor company is to locate potential properties to be used in a DST 1031 offering. The DST sponsor will typically review and analyze dozens and dozens of potential properties before finding a property that fits.
Once finding a property that potentially fits, the sponsor company begins to run financial models on the property to decide if it will work as an actual DST offering.
The DST sponsor company will from there begin to open up negotiations with the prospective property’s seller via a letter of intent, due diligence period and then entering into a Purchase and Sale Agreement.
During due diligence the DST sponsor company will typically order all environmental reports, appraisals and property condition/engineer reports, as well as conduct an analysis of the property’s lease and market/sub market.
The DST sponsor will also (if the property is not going to be an all-cash property) begin to arrange and negotiate financing and terms with potential lenders.
From there, the DST sponsor company will begin to market the DST 1031 offering to broker dealers and registered representatives in an effort to raise the required equity to fully fund the offering.
Once the offering is fully funded, the DST sponsor company will typically continue to have an active role with the property and investors, typically as the property asset manager. An asset manager’s role is to manage the properties and their tenants from a financial and legal perspective. The asset manager is often considered the manager of the property manager.
Some sponsors will act as the property manager of the DST 1031 property, and others will outsource the property management function to a third-party firm. This is a matter of preference as well as a matter of asset class, as many sponsors that will outsource property management functions for more management-intensive asset classes (such as multifamily apartments and senior care) will do in-house property management on asset classes with fewer moving parts, such as long-term NNN lease properties.
To best sum up a DST sponsor’s role, the DST sponsor is in the business of sourcing, financing, structuring and packaging properties to provide a pre- packaged 1031 exchange solution for 1031 investors.
The broker dealer is a securities company that is involved in the marketing and sales of DST 1031 offerings to investors. Broker dealers will often have a group of registered representatives that hold their securities licenses with the broker dealer. The broker dealer’s role is to supervise their registered representatives and to provide support on securities-related matters.
The typical role of the broker dealer in a DST 1031 property is to analyze and provide due diligence on DST sponsor companies and their DST 1031 offerings. Broker dealers perform this function with either an in-house due diligence team or outsourcing due diligence work to third-party due diligence providers.
Upon the broker dealer determining that a particular DST 1031 property is appropriate for their registered representatives to offer to clients, the broker dealer will enter into and sign a selling agreement with the DST 1031 sponsor company. This in turn allows the broker dealer’s registered representatives to offer to their clients the ability to invest in a particular DST 1031 property.
It is important to note that just because a broker dealer has conducted due diligence on a DST 1031 property (some actually conduct very little to no due diligence) and/or has outsourced due diligence to a third-party provider, this does not guarantee that a particular DST 1031 offerings is “safe.” Due diligence does not guarantee profits, returns or safety of a particular offering. Investors should be aware that due diligence does not mean an offering will not have problems or issues and that even offerings with thorough due diligence conducted on them could result in an investor’s loss of their entire principal amount invested. This is real estate, and there are no guarantees.
As noted earlier, the broker dealer will often hold the securities licenses of a group of registered representatives. The registered representatives are securities professionals who have successfully obtained certain securities licenses (e.g., Series 7, 22 and 63) to be able to offer to qualified investors the ability to purchase a 1031 DST property.
Many investors often ask if a real estate agent or broker is able to sell DST 1031 properties, and the answer is no. This is because DST 1031 properties are considered securities by federal and state regulators, as the investor is purchasing a piece of the real estate and not the whole property.
In the DST 1031 industry, we at Kay Properties and Investments have observed that there are two types of registered representatives who offer DST 1031 properties to their clients. The first type is what we call a specialist. This is a registered representative who specifically chooses to concentrate on DST 1031 properties for his or her clients. These registered representatives have helped many clients involved in 1031 exchanges and are often sought out by clients due to their reputation of specializing in these properties.
The specialist-registered representative typically is very active in the industry, attends industry conferences and has a strong understanding of commercial and investment real estate, as well as a strong understanding of the 1031 exchange and its rules and guidelines.
The specialist is often able to become a valuable resource to his or her clients and their CPAs and attorneys as the client is considering an investment in the DST 1031, because the specialist is involved in many, many DST 1031 property exchanges each and every year. At Kay Properties and Investments, we have grown a reputation throughout the industry and with our clients as specialists, and not generalists, because of the sheer amount of volume of DST 1031 business that we do each year and that we live and breathe DST 1031 properties every day.
The other types of registered representative that we have seen offer DST 1031 properties to investors are what we call generalists. The generalist is often a financial planner who has done one or two DST 1031 exchanges in his or her career. He or she may have the proper securities licenses to offer a DST 1031 property to clients; however, they often have a very rudimentary understanding of how these properties actually work and their potential benefits and risks.
The generalist often is preoccupied with all aspects of financial services, such as stocks, bonds, mutual funds, life insurance and annuities. Often the generalist will try to be all things to all people, and when a client has a 1031 exchange … the generalist is jumping right into DST 1031 mode for that client. The problem here is that these generalists often are not able to offer the valuable insight and experience, in my opinion, that a specialist may be able to. This is similar to how you would not want your knee surgery performed by a general practice doctor – you would want a specialist to potentially ensure the best outcome.
For a list of client testimonials and references of clients all over the United States that have chosen Kay Properties as their DST brokerage and advisory firm due to our specialized approach to DST properties please visit our Testimonials Page.