DST Property Spotlight

PROPERTY NAME

ExchangeRight Net-Leased All-Cash 3 DST

DST Offering Highlights

ExchangeRight Net-Leased All-Cash 3 DST consists of three corporate guaranteed net lease retail properties located in two regions of the U.S. The properties are 100% leased to three high-quality, recession-resilient tenants with proven track records and strong financials. The portfolio offers over 26,000 rentable square feet and has a weighted average remaining lease term of 17.2 years. Tenants include Daybreak Market, Dollar General, Family Dollar & Dollar Tree.

Loan Terms

No Debt

Net Lease Retail Property

Learn More About this DST

About DST Sponsor: ExchangeRight

Founded in 2012, ExchangeRight is a vertically integrated real estate investment firm that targets secure capital, stable income, and strategic exits to protect and grow wealth. ExchangeRight strategically acquires and manages long-term, net-leased assets backed by investment-grade corporations that operate essential businesses successfully in the necessity-based retail and healthcare industries.

Advantages of a Delaware Statutory Trust

Perhaps the most compelling reason to invest in a Delaware Statutory Trust is the ability to defer, reduce and even eliminate taxes related to the sale of investment property using a 1031 Exchange. DSTs are also a popular passive real estate investment offering ownership in institutional-quality properties with minimal landlord responsibilities. Delaware Statutory Trusts offer several advantages as 1031 Exchange replacement properties:

DSTs qualify as a like-kind property with a 1031 Exchange. This allows real estate investors to defer paying capital gains taxes on the sale of an investment property, often resulting in significant savings. In some states, capital gains taxes can be as high as 42.1%, including federal capital gains tax, state capital gains tax, depreciation recapture tax and net investment income tax. 

Typically, DST properties are structured with an emphasis on cash flow. By acquiring high-quality institutional property in cities with strong projected growth, DSTs can focus on seeking to preserve investment value and greater income potential for investors. The monthly income varies from trust to trust depending on the property type and investment thesis, but often, independent investors may be able to generate more monthly income through the ownership of a DST property than through direct property ownership.

Although a DST can own nearly any real estate asset of any quality, the underlying real estate held by DSTs tends to be high-grade institutional property. “Institutional grade” generally refers to a property of sufficient size and stature to merit attention from large national or international investors, and typically have the characteristic of high quality assets in major markets and at price points beyond the reach of individual investors and smaller partnerships.

Due to the rigid criteria established by the IRS for a DST to qualify as an exchange property, lower-quality assets are rarely eligible. As a result, DSTs often own high-quality assets with credit-worthy Fortune 1000 companies as tenants. If not for the DST structure, these properties would otherwise be unattainable for an independent investor to purchase via a 1031 Exchange. 

The minimum investment for a 1031 DST is typically $100,000 – significantly lower than the costs of purchasing commercial property outright.

Investors can effortlessly exchange into preferred real estate markets and favorable property types, optimizing their portfolio value.

DSTs are passive investments. As such, individual investors have no participation in the daily management or operations of the DST real estate. Once you select a DST investment and acquire your ownership, your work is done. Through a 1031 Exchange, investors can exit a management-intensive asset and shed landlord responsibilities without foregoing the benefits of owing investment real estate. This is a particularly attractive benefit for independent investors with major life changes ahead—for example, those entering retirement, growing a family or planning for an estate transfer. 

DSTs have a comparatively low minimum investment requirement, usually $100,000, making it easy to diversify across multiple assets to help mitigate risk. Under the IRS’s property identification rules for 1031 Exchanges, investors can reinvest the proceeds from an investment property sale into multiple DSTs, creating immediate investment diversification among different DST property types and locations. 

DSTs also offer estate planning benefits. Through a step-up in basis, beneficiaries can defer capital gains, depreciation recapture and net investment income tax upon the death of an owner. The estate can also divide a DST investment seamlessly among beneficiaries, something that is generally challenging for traditional, directly-owned fee simple real estate assets.

As an illiquid investment with fractional ownership, a CPA is able to discount a DST investment when calculating the value of the total estate. It is not uncommon to see discounts ranging from 20% to 30%, which can serve to reduce potential estate taxes.

DST exchanges rarely fail because the real estate has already been vetted and acquired by the DST sponsor. Using a prominent 1031 Exchange Advisor helps reduce the probability of a failed exchange. Real Estate Transition Solutions thoroughly vets all DST sponsors and DST properties. We believe a quality-control process and higher-grade investment opportunities help lower risk of a failed 1031 Exchange.

Given the DST Sponsor has already acquired the properties within a Delaware Statutory Trust, investors can purchase the beneficial interests in the trust quickly compared to many other replacement property options. This is ideal for a time-sensitive 1031 Exchange or for those investors who value continuity in their income as DST investors can typically close within 3 to 5 business days following the sale of their relinquished property.

Disadvantages of a Delaware Statutory Trust

Like all real estate investments, investing in Delaware Statutory Trusts involve many of the same risks, including potential lack of return and loss of principal. As long-term, income-focused investments, DST performance is largely dependent upon the tenants’ ability to pay rent. This presents a few notable DST risks including lack of liquidity, interest rate risk, and changing market conditions. Additionally, some of the characteristics of a DST may not align with an individual’s investment goals including the lack of personal control over the investment.

A lack of management control can be both an advantage and disadvantage. After all, the passive nature of a DST is one of the characteristics that make this such an attractive investment option. The DST Sponsor puts in place a highly experienced team of real estate professional to manage DST operations. However, some investors prefer to participate in the property strategy and operations. For those investors, the DST structure would not be a good fit. 

DST properties are typically held for 3 to 10 years. The DST sponsor has total control over the length of the investment and the exit. If an investor wants to exit early, the only option is to sell the DST interest to another accredited investor. The sale would also be subject to the same 1031 exchange guidelines, or the investor would be responsible for the capital gains tax due upon the sale. It should be noted there are DSTs that include liquidity via a 721 UpREIT.

As with any type of income-oriented real estate investment, investors may be subject to future vacancy rates and interest rate fluctuations, which could reduce cash flow potential and price appreciation. DSTs are also susceptible to changes in the IRS’s treatment of tax-deferred exchanges.