Kingsbarn Realty Capital recently closed on a six-asset healthcare portfolio fully occupied by long-term net leases. Its next step: to pool these properties, which are located in South Carolina, Kentucky, Wisconsin, Tennessee and Pennsylvania, in a vehicle that is becoming increasingly popular with 1031 exchange investors: a Delaware Statutory Trust, or DST. As is the case with these structures, Kingsbarn’s sponsor, KB Exchange Trust, will offer these properties on a fractional ownership basis to accredited investors such as 1031 exchange buyers.
As for Kingsbarn, that is its MO: acquiring credit-tenant properties in the healthcare sector, which it then pools into portfolios that are structured DSTs. Its real estate investment programs are offered through Triloma Securities.
What Are DSTs?
If you have to ask, you are not alone. In spite of their popularity, many investors, tax advisors and other financial intermediaries have never heard of DSTs, Brad Watt, managing director of Kingsbarn Realty Capital tells GlobeSt.com.
DSTs are a separate legal entity that qualifies under Section 1031 as a tax-deferred exchange. They are formed in accordance with the laws of Delaware. As the Kingsbarn portfolio illustrates, this investment structure provides investors with fractional ownership in real estate assets or a portfolio of assets. The property types can range from multifamily to single tenant healthcare or retail. “In a typical DST, individual investors purchase a beneficial ownership interest in a Grantor Trust that allows the investor to receive direct pass-through benefits of all income, tax deferral, and appreciation,” Watt says.
Their Growing Popularity
The combination of aging demographics, low investment returns, and highly appreciated real estate values are all contributing to the steadily growing popularity of DSTs. Since 2004, an estimated $20 billion has been raised in securitized 1031 co-ownership, primarily structured as DSTs, according to industry statistics cited by Watt. In the 12 or so months they have become particularly active, with investors placing nearly $2 billion of equity in DST programs. This year the market is expected to top nearly $3 billion, Watt says.
“Barring any unforeseen shock to financial markets or changes to current tax policy, DST demand is expected to increase,” he says.
Here is the main reason why: Annual cash yields for a typical DST can range from 5% to 6%, and distributions are generally paid monthly, Watt says. “In addition to the 1031 tax deferral treatment, most DST’s invest in building improvements, allowing for further tax benefits from depreciation. For many investors in higher tax brackets, this can mean taxable equivalent yields of nearly 10%,” he says.
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