Mid Atlantic Real Estate Journal — 1031 Exchange — March 15 - 28, 2013 — 21A


1031 E xchange

elaware Statutory Trust’s (DST’s) be- came relevant to the By Tim Snodgrass, J. D., AXXCESS Capital Delaware Statutory Trusts (“DST’s”) . . .” The Future of Fractional Ownership?” D

required the investors and bor- rowers in previous TIC struc- tures to state they would not act in a manner to cause a de- fault under the loan, thus the increasing the liability if they were to commit one of these acts. Commercial real estate lenders love this structure as they only have one “borrower” to deal with, and not up to 35 different borrowers (as was allowed under the Revenue Procedure). This is the case no matter howmany investors are in a DST investment. There is only one Manager, or specifically, a Trustee for the property. Again, this is both a

benefit and a burden. Distin- guished from a TIC invest- ment, DST’s have a set Spon- sor controlled Trustee, with the investors being completely passive. In situations that require quick action, there is no logjam with any disagree- ments between management and investors. Management makes the decisions. There can be multiple prop- erties within the DST, thus creating a “portfolio” within the DST. There are several Sponsors of DST investments in the market that take Net Lease or Multi family prop- erties, with different credit

profiles, and wrap them into one DST. Under the DST struc- ture, investors can come in with much lower minimums, since the number of investors is not an issue any more. It used to be acceptable practice that lenders would not allow more than 35 investors under a TIC fractional ownership structure. Under a DST, com- bined with the newly enacted JOBSAct of 2012, there can be up to 2000 investors in a DST. This means lower minimums and the ability for investors to spread risk with their capi- tal. Generally speaking, DST

fractional ownership invest- ments are structured with two types of commercial real estate, Net Lease properties (Retail) and Multi-Family properties (Apartments). Any property that is best suited for proper- ties subject to a long-term lease to a creditworthy tenant on a triple-net basis, and/or can also successfully be used with a “master lease” structure. Other property types used in DST’s include university and senior housing, hospitality, and self-storage facilities. “What are the burdens of DST structure”? The Trustee continued on page 25A

1031 f rac - tional own- ership mar- ket in 2004, with the as- sistance of some very focused pro- f e s s i o n a l s (lawyers and

Tim Snodgrass

business persons), and the blessing of the Internal Rev- enue Service (see Revenue Procedure 2004-33). “What did the IRS say, and what does it mean to investors doing 1031 exchanges”? First of all, they said that a beneficial interest in a DST qualifies as a real property interest for purposes of IRC Section 1031. That means you can defer capital gain (as of today has gone form 15% to 20%, plus a 3.8% Healthcare tax) via a 1031 exchange, with a replacement property that is a beneficial interest in a trust. Prior to this Revenue Proce- dure, most fractional owner- ship replacement properties were done in Tenant in Com- mon (TIC) structures. This is where the investor owned a fractional ownership in a larger property with other in- vestors, with great pains taken under Revenue Procedure 2002-22 to ensure these own- ership interest were NOT part- nership interests for purposes of IRC Section 1031 (investors had to hold title, and have the benefits and burdens of real property ownership and con- trol so as not to be construed as a partnership). While many of these structures allowed in- vestors to own a smaller part of a larger property. Under the stress of the downturn in 2008, many of those structures felt the pressure of some of the structural requirements man- dated by the IRS under the Revenue Procedure, Specifi- cally, in certain circumstances it became difficult to handle disagreements between own- ers if all the investors in a TIC property did not agree with each other on how to proceed, especially when time was of the essence. What are the benefits of DST fractional ownership? There is only one borrower and clos- ing statement, and investors do not have to sign “bad boy” carve outs from lenders, which

Covington Realty Partners arranges 1031 exchange property ownership through Delaware Statutory Trusts (DST’s), giving individuals the opportunity to invest in properties that were once available only to institutional investors. Class A net lease retail and multi-family properties positioned in primary markets and premier locations within specific secondary markets throughout the U.S. The Covington team has acquired well over $2.5 billion of commercial, retail, net lease retail and multi-family properties throughout the country. With our team's buy-side experience we have been able to identify opportunities within parameters often overlooked by others. Our capacity to carry out meticulous buy-side property due diligence and financial analysis helps mitigate risk, and increases the likelihood that a property's value will be preserved and/or appreciate. In addition to our in-house activities, we align with highly-regarded third-party organizations that perform market research, investigate legal and tax issues, consider financial metrics and conduct physical evaluations to help ensure the integrity of each transaction and your investment. We are actively seeking quality Net Lease and Multifamily properties to acquire for our investment portfolio. Please call us if you are in the market to sell. · · · · ·

Brian Kennedy - Vice President Covington Realty Partners 135 N. Meramec Ave., Suite 500 St. Louis, MO 63105 Office: 314-727-2424x206 Fax: 314-727-2434 Cell: 314-651-8024 bkennedy@covingtonrealtypartners.com

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