Create Liquidity in Real Estate Investments with Tom Donahue

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Tom Donahue, the CEO of True North Real Estate Wealth Management, conversed with Mike Anderson via the Anderson Files on Podclips and discussed why one should reap the benefits of investing in commercial real estate through Delaware Statutory Trust (DST). 

DST Investments are offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax-deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings. The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust.[1]

While the COVID-19 pandemic is affecting industries worldwide, there are some industries and sectors that are quietly flourishing and a keen investor must take advantage of these opportunities. Through this comprehensive podcast, Tom Donahue provides relevant information regarding liquidity in commercial real estate markets and also helps an investor know the alternative paths to effect the 1031 exchange. 

Some Excerpts from the Podcast

1. Regarding the subject of liquidity in real estate, what are the alternate paths to effectuating the 1031 Exchange?

One of the alternatives that we have been using is the Delaware Statutory Trust (DST) which is very similar to a limited liability company whereby you can have multiple investors investing in a single-purpose asset.

Tom describes the two different types of real estate.

  • Multi-Candidate Property – people tend to prefer these types of properties because it’s risk-averse and it was highly unlikely that a single candidate would be able to cause a financial collapse in the asset. 
  • Single-Purpose Asset – with a large credit tenant. 

It is important to own a very large institutional-quality asset with at least 15-20 years of lease term remaining.

For eg: If you want to sell a property worth $1M in value and you want to sell that property, instead of going out and finding a property within the 45 days window, you can factor in your exchange in one of these long-term credit tenant properties. To do the exchange, you don’t need 45 nor 180 days. It can be done within 24 hours so there is a lot of liquidity.”

2. For the investor, when they have a highly depreciated property and where they are paying a high tax scenario, the DST makes sense. Three months into the pandemic, where its affecting earnings and growth, appetite for risk capital, investing in general, how are you finding the market right now?

The question we all ask in this industry is WHAT do you invest in? Office buildings and retail markets will be challenging markets to invest in. We want to avoid these market conditions that is why we go out and will acquire these very large assets like the Amazon building. We think that the risk of investing in a building like Amazon is fairly low. Because of what was experienced in the pandemic, the online sales are going to continue. We are looking at data centers right now, which kinda took a little bit of a slow down 6 months ago, now they are picking back up significantly, with the development of these new data centers like Apple and Google, because they need to increase their data due to online sales happening so rapidly, so that’s why we like those markets…

3. As far as liabilities and holding interests in a Delaware Statutory Trust, can you describe that?

…because the tenant is credit rated and very strong, the only thing that lenders look to is the tenant, they are not looking for any type of personal guarantee, either the trustee or any of the underlying individual investors.

One of the things we did experience in 2008, in the CNDS market, is even though the loans that were entered into were considered ‘fully not recourse’ that’s still not a guarantee. Often lenders will go back and say well there is a breach of this covenant, therefore this loan has now become recourse.

But this is not the case with these type of assets, there is none of that. These are fully non-recourse assets so the investors do not have liability.

4. As far as benefits of utilizing a DST, could you describe those?

  • “One of the main benefits is that it is a guarantee! You know the property that you are investing in. The properties are already owned by the trustee. You don’t have to go out and search for a property for 45 days.” 
  • “You get to own a piece of a very large piece of an asset at a very low entry point such as $500000 or $1M. Most people don’t have access to that.” 
  • “It’s not a K1 issue. These are operating statements that are issued at the end of each year. They need not wait for a K-1.” (The Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in partnership interests. The purpose of the Schedule K-1 is to report each partner’s share of the partnership’s earnings, losses, deductions, and credits. It serves a similar purpose for tax reporting as one of the various Forms 1099, which report dividend or interest from securities or income from the sale of securities. [2])

5. How would an accredited investor get involved with this kind of opportunity? How would they approach your firm to enquire about the opportunity? 

They can contact me directly. We are happy to educate anybody. We have a team of advisors and we work with a large accounting firm in the country and the largest law firm in the country. So, we have a lot of resources for people to, if they have questions, to tap into. They can reach out to me and I would be happy to refer them to whomever they need to speak to.

Tom also discussed:

  • The product types that are the best fit for the DST structure.
  • Some defined benefits or values from focussing on different geographic areas.
  • And whether the southeast regions do come up on his radar.

Catch the full report on how to get liquidity in your real estate investments, listen to Tom Donahue’s comprehensive interview here.

You can also contact Tom directly on tom@truenorthrewm.com to get help on queries regarding commercial real estate investments as well as more information on how to utilize the Delaware Statutory Trust to your advantage.

 

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