Real Estate: 1031, DST & OZF Opportunities

As part of our investment offerings, Dumaine Investments provides guidance in investing in alternative investments such as private placements in real estate, primarily via 1031 Exchanges. These investments, typically conducted through Delaware Statutory Trusts (DSTs), are trusts created under Delaware law that are a means of passively investing in real estate for accredited investors. 

Advantages:

• Investors can defer the capital gains tax from the sale of investment real estate indefinitely by re-investing the proceeds into a DST by undergoing a 1031 Exchange.
• By investing in multiple DSTs, there is an opportunity to significantly reduce risk by diversifying investments geographically as well as amongst the various types of different investment real estate such as apartments, individual housing, essential services retailers, medical facilities, self-storage, etc.
• DSTs allow for investors to passively invest in real estate without the many challenges of active real estate management and ownership.

Disadvantages:

• Lack of liquidity as funds can be locked up in a DST for up to 10 years with extremely limited means of selling the investment before the trust is liquidated.
• Fees due to the property’s third party management as well as an additional layer of fees levied by the DST’s sponsor, primarily at the property’s purchase and sale, which reduces overall returns.
• Total lack of control over the investment’s operations and management as well as the timing of the investment’s sale.

Simple 4-Step Process to Conduct a 1031 Exchange:

1. Property owner sells property and the sale proceeds are escrowed with a Qualified Intermediary (QI).
2. Within 45 days of the act of sale, the seller formally identifies to the QI potential DST investments equal to 200% of the total funds to be re-invested.
3. Within 6 months of the act of sale, the QI transfers funds for the purchase of the replacement property(s) to the DST sponsor.
4. Property seller, i.e. the 1031 exchanger, receives ownership interest in DST(s).

Examples of Different Types of Potential DSTs:

• A portfolio of 17 self-storage properties in three states
• A portfolio of 4 multi-family apartment communities located in 4 metropolitan areas on the East coast
• A portfolio of triple net leases of essential services retailers in the Midwest and South
• A mobile home park in Florida
• An absolute net lease on a light industrial factory and corporate headquarters

Additionally, Dumaine Investments also provides assistance to those investors looking to shelter capital gains through investments in Opportunity Zone Funds (OZFs). Opportunity Zone Funds (OZFs) invest in lower-income areas with special tax advantages established by the Tax Cuts and Jobs Act of 2017. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder’s unwillingness to trigger a capital gains. With an OZF, capital gains may be deferred for 5 years at which stage 90% of the original capital gains tax must be paid. After 10 years, if the property is sold at a profit, ALL potential federal capital gains taxes are waived.

OUR BACKGROUND IN ACTIVELY MANAGED INVESTMENT REAL ESTATE & PASSIVELY OWNED DSTs, & OZFs

Dumaine’s founder, Clifford F. Favrot, has 19+ years of experience running both the asset and property management for multi-family apartment communities. In his role as the Managing Partner of Chateaux Dijon Apartments, he oversaw all aspects of daily activities as well as the financial and strategic operations for a 330+ unit residential apartment community. During his time with the apartment complex, he oversaw a $25+MM property reconstruction following Hurricane Katrina which resulted in a substantial increase in rental revenues. In the summer of 2019, and after selling the property for a premium to recent comparable sales, he re-invested the sales proceeds into a highly diversified portfolio of DSTs and OZFs which have yielded an appreciable increase in risk-adjusted cash flows.

Please give us a call if you would like to discuss these real estate investment opportunities further at (504) 521-7350.