DST Investments – What They Are and Why They’re Important

It’s interesting the evolution of these fractional ownerships of real property, what’s happened through the years. We had the whole Tennessee incumbent deal which sort of got hijacked and blown up and then everybody looked at it as a bad, bad thing. I mean ticks are horrible, which I totally disagree with. It was the sponsors that were horrible, not the tick product – not product, the tick structure that was the issue.

David Moore: Now we’re primarily looking at DSTs and I’m sure a lot of people I speak on this every day and I’ve got clients every day that are going through this process, but so many people have no idea what a DST is. Since you’re , why don’t you explain to us briefly what a DST is and why somebody might be interested in one?

Bob Zink: Sure. Thank you, David. You know, just a little bit of maybe history even further, when I started in real estate, it was the limited partnership. Put together limited partnerships where you have a general partner that did the work and 8, 10, 12 limited partners who were investors and kind of went along for the ride and the benefits.

David Moore: Sort of like a husband and wife, the wife does everything and we all get the benefits?

Bob Zink: Exactly.

David Moore: Got it.

Bob Zink: As long as you keep your mouth shut at work.

David Moore: Yes.

Bob Zink: Which I haven’t learned. The limited partnership then went to the tenant in common and you’re right, the tenant in common properties were, I guess properties that were a function of a bad operator, bad ownership.

David Moore: Timing.

Bob Zink: Timing, but often the ownership that they were good at raising money but they weren’t good at operating property.

David Moore: Yes.

Bob Zink: That’s often the case is you got to find out if you’ve got a money raiser or a property operator and you really need both. That’s now evolved into the DST, which is acronym for Delaware Statutory Trust, which is where it started and the lawyers put it together because it’s an easier vehicle to work and own real estate and easier for the lenders, easier for the sponsor.

What we have is the ability to own large pieces of property, which there’s lots of benefits to that, David. One is somebody else is looking after the real estate, so we don’t have to be worrying about it when we’d rather be traveling or spending time with grandkids.

David Moore: Skiing.

Bob Zink: Skiing, exactly. Skiing up in Canada. Also, something that isn’t mentioned too often is today, if you and I go out and buy a four-plex, lots of people can buy that four-plex and their returns get compressed. There’s not a great return today and certainly no cash flow.

We could take that same money and put it into a DST and have five to six percent starting cash flow that would grow over time and then in addition, of course, we would have depreciation. We would have debt reduction and get a return over five, six, seven years up in the mid teens. We can own part of a $35 million building as opposed to a million dollar building.

David Moore: As far as the DSTs, Bob, are they typically a single asset? Are they multiple assets? I, a lot of times I’ll describe a DST as sort of a mini-exchangeable REIT, for example.

Bob Zink: Right.

David Moore: Just to clarify things, I know we’ve discussed it before, you can exchange in a certain REITs of something called an up REIT that you can get into, but if you use that process, you’re going to get in, you can’t get out. You can’t exchange out of that thing again where a DST you can do an exchange in and out.

Bob Zink: Yes. They’re both, that’s the advantage of the DST market. There’s DSTs that they own two, three, four properties and there’s some where you just own one. The range of debt is all over the market. There’s free and clear DSTs and there’s DSTs in debt all the way up to 75, 80%.

David Moore: We’re looking at a 1031 that has a certain value and equity requirement. Keep in mind, a lot of people look at a 1031 and they say, well you have to replace debt in an exchange and you don’t. Debt can go away two ways, one by going down in value, the other by adding cash. We’re really primarily concerned with debt and equity and you’re telling me that you’ve got product, everything from don’t you have a coupon clipper type thing? Something that’s got very little, if any, equity going in but.

Bob Zink: Yeah. There’s coupon clippers that really have zero cash flow where they’re dedicating all the cash flow to paying off the debt, which will then cover those properties we’ve gotten into for either leveraging them up.

David Moore: Savings.

Bob Zink: Saving-

David Moore: Saving somebody.

Bob Zink: Yeah, saving somebody. Yeah, the DST market has been around now long enough that there’s providers providing whatever kind of asset you need, multiple assets. Because they’re a larger asset, you’ll get a higher return than you and I would get buying a rental house or a four-plex or even a six or eight-plex in our present market.

David Moore: Definitely. Definitely. They might have deeper pockets in a bad turn too.

Bob Zink: Deeper pockets than others. DSTs have been around now 20, 30 years. They have a long history.

David Moore: Nice.

Bob Zink: Very deep pockets and they’re taking care of those tenants, toilets, trash and government regulations.

David Moore: Definitely. Well, thank you for joining us again today. This is once again David Moore with Equity Vanish with Robert Zink, Zink Realty Advisors and we’re talking about investment real estate, DSTs in particular. Thank you.

Bob Zink: Thank you.