It is called the Amazon Effect—and you’ve probably heard a lot about it. The ecommerce giant has reshaped, well, nearly everything, from the way that consumers think about shopping and accessing goods to the global supply chain. For institutional investors, the Amazon Effect has squarely placed industrial properties as the darling of the commercial real estate market, and Amazon tenants are among the most coveted.
Amazon tenants are also among the fastest growing. Amazon recently announced plans to open 1,000 small delivery hubs near population centers throughout the US to bring products closer to consumers. As a direct result of growth from ecommerce companies like Amazon, CBRE predicts the U.S. will need an additional 1.5 billion square feet of industrial space within the next five years. This activity has made industrial distribution properties among the most sought-after assets.
The insatiable demand has encouraged Amazon to seek alternative properties as well. Many analysts predict that Amazon could repurpose obsolete and vacant big box department store properties into industrial distribution centers, another sign of the soaring demand for these spaces.
While investors are targeting the broad ecommerce market, Amazon is arguably the most desired and top-tier credit tenant for these properties, and property owners are happy to lock in long-term triple net leases, which help to reduce operating expenses for the owner. Like most industrial properties, Amazon operates facilities on triple net leases, meaning that they pay for most operating expenses, including common area maintenance fees, insurance and property taxes.
The benefits of this trend aren’t for institutional capital alone. Small and mid-sized investors can tap into the earnings potential of Amazon industrial assets through tax-deferred 1031 exchanges and passive real estate investing.
Passive investing simply means that the investor does not take an active role in managing the property or business. It includes equity assets, like stocks or mutual funds, or real estate assets, like REITs or Delaware Statutory Trusts. When it comes to real estate, there are direct and indirect styles of passive investment.
Real estate is generally considered a passive income asset, but anyone who has ever self-managed an apartment property knows that isn’t always true. Owners with a professional property management firm that handles the day-to-day operations, maintenance and leasing of the property, or commercial owners with tenants on triple-net leases—a lease where the tenant pays for the majority of the operations costs—have a more passive investment experience. Leveraging this strategy, a property owner simply collects the income each month while playing a minor role in the operations of the property.
The indirect style of passive real estate investing is completely hands-off. An investor can buy into any number of real estate equity vehicles, gaining fractional ownership in the asset or portfolio of assets. Other than the initial capital investment, the investor plays no role in the operations of the property, but shares in the profits or income.
Passive real estate investing has grown tremendously in commercial real estate, and today, there are more opportunities than ever before to place your money in a high-quality, hands-off equity vehicle. Commercial real estate provides stable income and strong appreciation, but these assets also come with a high-barrier to entry and require expertise to successfully execute the business strategy. Passive investing, however, can unlock the tremendous financial and wealth-building benefits of commercial real estate assets.
Today, there are a lot of ways to place capital in real estate through an equity vehicle. Some methods are new—like crowdfunding or opportunity zone funds—and others are tried and true, like Delaware Statutory Trusts, REITs and real estate funds, which are among the most popular and proven vehicles.
A Delaware Statutory Trust or DST is a type of business trust that owns and operates real estate property. A real estate firm, known as the DST sponsor, acquires a property with its own capital first, then structures the property in a DST and brings it to the market through an official offering. Investors buy a fractional or concurrent ownership stake in a quality, professionally managed asset and receive monthly income in proportion to their ownership stake. DST’s have increased in popularity over the last decade because they qualify as a replacement property in a 1031 exchange.
A real estate investment trust—or REIT as it is more commonly known—is a company that acquires, owns and operates real estate assets. There are public and private REITs, as well as traded and non-traded REITs. Private non-traded REITs work typically with institutional capital sources, but public both traded and non-traded REITs are registered with the SEC and shares are either traded in the public exchange markets or available for direct purchase from the issuer. Historically, they pay healthy dividends of 5% on average, much higher than the average stock dividend of 2%.
An alternative to investing directly in a single REIT, funds such as a real estate interval fund invest in a variety a REITs, providing investors greater diversification. Some real estate funds trade in public exchange markets and others can be purchased directly through the fund. Unlike DSTs and REITs, real estate funds do not pay out dividends or monthly income. Instead, they produce value through appreciation at the exit or sale of the investment.
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Through these passive investing strategies, individual investors can access high quality, institutional grade assets—which brings us back to the Amazon Effect. While these strategies are not exclusive to Amazon, they are an opportunity for investors to take advantage of the industrial bull market.
One of the strategies to consider is a 1031 Exchange using a Delaware Statutory Trust to own Amazon Net Lease properties as a 1031 replacement property. This strategy offers the tax deferral benefits of a 1031 Exchange coupled with the passive management benefits of a DST and the stable income potential of Amazon industrial properties.
Since 2004, DST investments have qualified as a replacement property in a 1031 exchange. Although this exchange let’s owners shift their business model from direct to fractional ownership, all of the 1031 exchange basics are the same. The seller has 45 days to identify a replacement property, in this case, one or more DSTs, once they sell an asset. The identified replacement property must adhere to one of the three allowable identification methods: the 3-property approach, 200% approach, or 95% approach. The transaction must close in 180 days from the original sale of the property. Like a standard exchange, investors can defer capital gains taxes through this transaction.
There are a number of DST investments from reliable sponsors with a successful history. DST sponsors will structure the trust, which includes property inspection and due diligence, securing debt if needed and structuring the DST offering in compliance with SEC regulations. All of these costs are included in the official offering.
For Amazon-occupied properties, investors should look for industrial DST offerings. Per SEC regulations, DST sponsors cannot publicly advertise current offerings. To find an offering that fits your goals, research reputable sponsors consult a licensed 1031 Exchange Advisor.
There are tremendous benefits to investing in a DST through a tax-deferred 1031 exchange. Exchanging out of direct ownership eliminates the work of daily property management. DSTs also have low minimum investments – typically $100,000 – allowing investors to diversify their exchange across multiple DST properties.
Because DST investments are typically institutional-grade assets, like an Amazon net leased property, they can potentially deliver higher monthly income and appreciation than direct ownership—depending on the asset of course.
Of course, like any investment, there is also a downside. Lack of liquidity and timing of exit are primary DST risks. DST properties are typically held for 3 to 10 years and early exits are typically not possible. While one of the benefits of a DST is hands-off management, it also means that investors do not have any voice in management decisions. For this reason, it is imperative that you choose a strong sponsor with a proven track record when investing in DST real estate. Leveraged DST properties can also pose a risk. High leverage—at 80%, for example—can significantly reduce monthly cash flow because the majority of the profits will be used to pay the debt service on the asset. Most DSTs use leverage between 50% – 58% so as to not take on undue risk. When considering a DST property, conduct thorough due diligence before investing.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potentially adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. Securities offered through Aurora Securities, Inc. (ASI), Member: FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a Registered Investment Advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.