Over the years, I have seen many clients that started to purchase a NNN property for a 1031 exchange ultimately decide to invest in a Delaware Statutory Trust 1031 property instead. In many cases these clients are drawn to NNN properties because they think that is the only choice to achieve passive ownership of real estate but are concerned about placing such a large amount of their net worth into one single NNN property.
That’s why the DST 1031 option has become an increasingly popular option for investors that were previously considering a NNN property. Here are some of the reasons why 1031 investors may choose DST 1031 properties over traditional NNN properties:
Access to the same type of NNN leased real estate and tenants
Tenants such as CVS, BJ’s Wholesale Club, Walgreens, Bridgestone/Firestone, Advance Auto Parts, Sherwin Williams, FedEx, 7 Eleven, Starbucks and Dunkin’ Donuts have been structured and used as DST 1031 properties in the past. Many investors love the idea of this caliber of tenants potentially paying them rent each month.
It is important to note that actual tenants will vary depending on the various DST 1031 properties available at the time of your exchange. The companies listed may not be represented in all programs and may not always be available.
Diversification*
Many 1031 investors realize that placing a large portion of their net worth into a single NNN property is just not prudent. The idea of placing $2 million into a 7 Eleven, $1.8 million into a Starbucks or $4-15 million into a Walgreens or CVS make clients nervous from an over-concentration standpoint.
The DST 1031 property provides a potential solution to investors wanting NNN leased properties and national tenants but with the ability to build a diversified portfolio with NNN properties in various geographic regions, across multiple tenants, and offered through a variety of sponsor firms. This is in contrast to “betting the farm” on a single piece of NNN property.
This concept is similar to why investors do not place 100 percent of their retirement accounts into a single stock but rather purchase mutual funds or exchange traded funds (ETFs). This is because they do not want their retirement accounts to “live or die” off of the performance of a single stock.
It is important to note that diversification does not guarantee against losses or guarantee profits. Investors should speak with their CPAs and attorneys for guidance as to if a DST 1031 property investment is suitable for their particular situation prior to considering a 1031 exchange.
DST 1031 Properties Allow Investors to Access Both “Anchor and Buoy” Investments
One of the strategies many investors employ for Delaware Statutory Trusts is combining both Anchor and Buoy properties. For example, an Anchor investment is one that has a lower degree of potential variability in monthly distribution performance like long-term net leased assets with a single corporate -backed tenant. This Anchor investment provides the potential for greater stability during times of uncertainty, economic turmoil, recessions, and pandemics.
On the other hand, a Buoy investment has the potential for more variability regarding the ability to grow net operating income through rental increases. For example, multifamily apartments and self-storage properties typically have shorter lease terms that can be especially attractive to investors because they have the opportunity to increase rents frequently. Buoy investments provide investors potential relief from inflationary periods by allowing the landlord to pass along any potential inflationary pressures to his or her tenants.
DST 1031 properties are “pre-packaged” for Fast 1031 Exchange Closings
For an investor in a 1031 time crunch, a DST property that has been pre- packaged can be a potential solution to a very real capital gains tax burden. The 45-day identification period of a 1031 exchange moves very quickly, and investors wanting to purchase a single NNN property have very real risks of a failed exchange due to failed financing, issues with third-party reports such as appraisals and environmental reports, and sellers not disclosing material items in the property’s lease, such as early termination clauses or co-tenancy clauses, which can change the economics of the previously agreed-upon purchase price.
Many things can go wrong when trying to purchase a NNN property. On the other hand, the DST 1031 provides a solution to investors not wanting to be burdened with the closing risks, resulting in a potentially failed 1031 exchange of a NNN property.