Jason Salmon 0:00
You sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary. That 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value. With the Delaware Statutory Trust, these DSTs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already has the debt on it. And the great thing further is that it’s not recourse to the investor so they don’t have to sign for it.
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J Darrin Gross 1:09
Welcome to Commercial Real Estate Pro Networks CREPN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Jason Salmon with Kay Properties and Investments. And in just a minute we’re going to speak with Jason about Delaware Statutory Trust and 1031 exchanges. But first a quick reminder, if you like our show, CREPN Radio, there are a couple of things you can do. You can like share and subscribe. And as always, please consider leaving a comment We love to hear from our listeners. Also, if you’d like to see how handsome our guests are, under normal circumstances, you can check out our YouTube channel. And that’s Commercial Real Estate Pro Network on YouTube. And while you’re there, please consider subscribing.
With that, I want to welcome my guest. Jason, welcome to CREPN Radio.
Jason Salmon 2:22
Thank you. I’m glad to be here.
J Darrin Gross 2:25
I’m glad you could join us and looking forward to our talk. Before we get into the topic, if you could just take a minute and share with the listeners a little about your background.
Jason Salmon 2:39
Yeah, in in commercial real estate in some way, shape or form for about 20 years, probably 20 years plus at this point and started out on commercial real estate research side. Eventually that evolved into private equity real estate and then evolved further into specialization with 1031 exchanges, which is a big part of commercial real estate investing for for many. And beyond that the Delaware statutory trust structure, which is a pretty specialized 1031 exchange vehicle, but kind of been around the space for quite a while and many, you know, wearing many different hats.
J Darrin Gross 3:27
Got it? You mentioned research, can you speak a little bit to what your role was and like the level of properties and then what I mean were you working for a fund? Were you working for an investor? I who, what was your your situation?
Jason Salmon 3:47
Worked for commercial real estate research data and analytics firms. So they were the firm itself was collecting data basically on vacancies, sales, absorption, new construction, leasing activity, concessions, all these things across the board in various sectors, asset classes of real estate. People were collecting that information. And then ultimately those got synthesized into quarterly reports. And part of my role is, you know, was one building out a database itself and, and maintaining it.
And then one of the roles that I had, while there for many years was actually to write and edit the narrative quarterly reports for over 200 markets around the United States in commercial real estate asset classes across the board. So writing reports, market conditions, analysis for you know, the users of these reports predominantly were institutional, but there were a lot of private investors, they hire, you know, assets under management. But essentially, these reports will be used by publications as commentary. The reports will be used by lenders when they were underwriting their, their real estate for for lending, and was also used by asset managers to assist with their decisions on acquisitions or kind of timing and even ultimately, to sell. And in fact, it’s interesting even today, you know, I’ll see some of the asset managers that we work with might are still using those, you know, reports, not the old ones, but the current ones for their decision. Sometimes I’ll see the name of an old firm that I had worked with, in there and it’s, you know, it’s a little validating and it’s kind of a small world. But that’s kind of what I was doing at the time, just from a research standpoint. So researching commercial real estate market conditions in various markets for real estate sectors around the country.
J Darrin Gross 6:16
Yeah, I appreciate you dive into that a little bit. I think sometimes the the notion is there, there are firms that do that, but I don’t know that I’ve had the opportunity to speak with anybody that was intimately involved in the underwriting or reporting of the information. So I appreciate you taking and I would assume that that just as a base level of understanding of commercial real estate, that was a nice entry point for you for the rest of your career. Do you find that so?
Jason Salmon 6:48
Yeah, I mean, yeah, I mean, it’s it’s interesting, as you know, when one is at the beginning of their career, it’s always interesting trying to figure out what’s what, at that time, it was the exact right thing for me I’m an analytical person at heart. And it just made a lot of sense. So, you know, the numbers, seeing kind of how trends, you know, were occurring, seeing kind of, maybe, you know, even headwinds on the horizon and seeing what’s what that was very gratifying for me. I enjoyed it. It was great. And certainly, I have no doubt that it’s prepared me, I think, with an in depth knowledge to actually ply my trade, as I do my day to day today. I think it it all helps I would not have I couldn’t imagine it any differently. And now for what it’s worth. I appreciate that experience.
J Darrin Gross 7:41
Well, that’s good. And then you mentioned private equity. Were you raising capital or what was your role in the private equity firm?
Jason Salmon 7:54
Purely raising capital. That was but they were it was for real estate but, but it was capital raising for private equity real estate in different vehicles kind of across the board so somewhere you know, I guess you get as a overarching I don’t really like to make blanket statements but it would they were syndications. They were syndicated real estate deals. And then that kind of evolved in other kind of larger private equity real estate vehicles, as well, but a capital raising Yeah.
J Darrin Gross 8:30
Well, those are two unique I guess roles in commercial real estate and have a fundamental understanding of both, I would think, would be a nice base level of understanding and give you kind of a just an understanding. I think anytime you’re talking to somebody and they don’t understand or they gloss over or think they know some of the inner workings, I would think it would tend to translate as you’re speaking with, whether it be, you know, potential customers or, you know, whatever level that that would that would give you an edge. I would think that if you feel that way or not, but I would think it would.
Jason Salmon 9:13
I hope it always has. I mean, if you like, metaphorically speaking or analogy of, you know, if you, you know, if you’re batting a certain batting average, I mean, you could strike out, you know, six, seven out of 10 times and be a Hall of Famer or whatever that you know, adage is. I mean, for, for what we’re dealing with. It’s really not for everybody. I mean, I think what I do today is a little different from what I had done previously, years ago. But realistically, it’s a very specialized thing. I mean, the 1031 in and of itself, is a major motivation and that, you know, kind of stands on its own to some extent. Taking that out of it and we’re talking about in you know, commercial real estate investing. It’s not for everybody. And fortunately for me, I like having conversations with people. And I’m happy to do it. And, you know, if my batting average is 100 maybe, you know, I don’t know if that’s all star game territory or not, but I, you know, certainly at that rate, if somebody wanted to do it, it has to make sense. It’s a phenomenon known as suitability. It’s very important, of course, when you deal in securities, because that is kind of the universe that that we dwell in. And so whether it be present, or in the past that always factored in. And, you know, for me, it’s really just a matter and it always has been of established, establishing a relationship with an investor, kind of knowing where they’re coming from. And then kind of seeing where it goes that it’s very easy, you know, to know that generally speaking, people would like, you know, when we, you know, just because of certain things we can’t get into specifics of it, but people want higher returns lower risk And they want to make profits. That’s easy to know, as a general sense, all be it every deal. You know, a real estate deal, especially a private placement stands on its own. It comes with its own business plan and its own risk factors and they stand on their own. So that, again, is something that throughout my career on this side of the business is just really important. But yeah, I mean, I like having conversations. I like talking to people about, you know, what they’ve been doing with real estate, what they’re doing now, what they’d like to do in the future, how that fits into the big picture with their, you know, life plan, estate planning, things like that. And that all weighs in on, you know, if I can or can’t help them. And you know, and certainly there are times where I tell people I wish you the best and my you know, there’s nothing we can do. I just wish, I wish you well. Other times if people eventually do become my clients, then you know, we stay pretty close together, you know along the way.
J Darrin Gross 12:03
Got it. Well, let’s get into our topic here. And and, you know, today the the idea is to talk about Delaware Statutory Trust. But I’m wondering if you’d like to take a minute and talk just a little bit about 1031 exchanges, given the fact that they’re intimately related, as far as you know, where ones coming from and how they get to a Delaware Statutory Trust. Do you Is it fair to start from or maybe we start from somebody who has an investment, and they’ve had it for a long time and they’re, they’re facing either paying taxes, capital gains taxes, and recapturing dish depreciation, or they could do a 1031 exchange into a another property and or That that other property could be a Delaware statutory trust type type of structured property. How would you like to address that?
Jason Salmon 13:13
Yeah, I mean, I think you’re right on, I think we should start, kind of at the top level, the 1031 is kind of the linchpin of the whole thing. Delaware Statutory Trust fits within that if applicable, but, you know, they they’re not, you know, bound at the hip together, if you will. But, but you’re right. The 1031 exchange itself is called that because it’s section 1031 of the Internal Revenue Code. By the way, this is the point in the conversation where I have to say, I can’t give tax or legal advice because one should always consult their own CPA and attorney and guess how many times a day I say that, but the 1031, you know, effectively has, you know, some form of like, kind exchange so 1031 Like kind exchange for real estate. Like kind exchange has been around for decades. And really the genesis of this was regarding farmers, their land, their livestock equipment, all sorts of things with that, you know, played into this method of tax deferral. Now, fast forward, the modern era of the 1031 exchange was, I think, right around 79 came to be known as a Starker exchange. And that really laid out the groundwork for the framework for the 1031. As we know, it’s still today for real estate.
Now, mind you with a caveat there. There was some tax reform a few years ago, now 1031. That’s the whole light kind thing. That that like kind means real estate for real estate and I’ll dig in them in a second. But years ago, you could sell artwork and you could buy artwork. You could sell airplanes, and buy airplanes. You just couldn’t sell airplanes and buy real estate and you couldn’t sell real estate and buy artwork and things like that for 1031. So that’s interesting. But with tax reform, that all changed a little bit. The good news for for my industry and my clientele, is that the 1031 exchange for real estate has remained in tact. And that being said, what that means is like for like, so if somebody is an investor, a real estate investor, so again, primary residents, you can throw out the window that doesn’t count, but investment real estate that has been held for kind of that reason. And, you know, again, one should always consult their own CPA on whether or not the 1031 is a valid tool for them to use. But if somebody’s own investment, real estate, whether it be a rental home, a condominium, multi, a four Plex two family 300 units Commercial Property single tenant net leased and office building something was their family business and they sold it. And then they, you know, they sold the business and they maintain the real estate and then their landlord, all those sorts of things. If you’re a landlord in some way, shape or form, chances are, if you sell at some point, you might have the opportunity to do a 1031. And you were right on. So what you’re potentially deferring the taxes, you’re potentially deferring by doing a 1031 exchange are your long term capital gains. Your depreciation recapture tax at a rate of 25% state tax, if applicable, depending on where you live and where your real estate is, and then possibly even the 3.8% Medicare surtax, and there could even be other stuff on that. So it does add up, potentially. So those are the taxes that if you do the 1031 exchange the right way, you could potentially defer those taxes and what that means is when you sell You can’t take possession of the proceeds. You can’t take the money, you must enlist the services of a professional organization called the Qualified Intermediary. We call them to QI for short. And what happens is, they’re part of that transaction. So when you sell, they get the money, and they escrow it and they’re the ones that are enacting the mechanics of the 1031 exchange. So once that happens, let’s say somebody sells today, and their funds go to that QI and sit in escrow. There are two clocks that are ticking concurrently. One is a 45 day clock and one is a 180. And there’s a little there’s a but with that. One of them the 45 days is to identify replacement property, and we’ll get to that in a second. The other one is 180 days to close, or the due date for your taxes for which for the year in which your property was sold, whichever comes sooner.
So there and then there’s rules within for what you can and can identify and you know how many properties or the number and, and that’s kind of how that goes. But the light kind aspect means if you sell a condominium and you want to buy a ranch, you can do that. You sell a ranch and you want to buy an office building, you can do that. You sell the office building and you want to buy raw land, you can do that. You sell the land, and you want to buy an industrial building, you can do that. You sell the industrial building, and you want to buy, you know, a handful of rentals, you can do that you sell any of the above and beyond. You can do you want to buy do a DST or DSRs plural as replacement property, you can do that. And the reason that the Delaware statutory trust structurally is available as replacement property is through what’s called revenue ruling 2004 dash 86 and that put the Delaware Statutory Trust Which has been around the trust like any other just happens to be a Delaware Statutory Trust and they’ve been around for decades. It’s just that the use of it for the purpose of a like kind 1031 exchange came into being through this revenue ruling, which allows private high net worth accredited investors, it means that you have to meet certain network standards, either individually or as an entity can participate in these private equity real estate deals for 1031 exchange, and I have a lot of direct cash investors also, that just would rather be passive. And I guess we could, you know, I can I can stop there, just based on the 1031 and where DST is the Delaware statutory trust fits into it, because there’s a lot more to it, but you know, I’d like to be as efficient as possible. But
J Darrin Gross 19:50
Yeah, let’s just let’s kind of pause there just for a second. So that again, that the the starting point is if if you are in for The premise of our conversation primarily would be somebody that’s a, an investor currently has been for a period of time, I tend to find that this gains the interest of people who have been an investor for a longer period of time as opposed to somebody that bought something a year ago, and all of a sudden has, you know, potential gain with very little depreciation, I tend to find at least the conversations I’ve had with insurance clients. It really resonates with somebody who’s had a property for 20 plus years. You know, if it’s a residential property and they’ve had it for more than 27 and a half years, theoretically, their depreciation could be used up or, or, you know, a very minimal amount still be available based on recapitalisation. And when they when they face that way, What happens when we sell and realize that all of the years that they’ve been receiving the benefit of depreciation, they have to recapture all that, plus whatever the gain is from their basis. So if they’ve depreciated it, or you know, if they bought it for 100, and they sell for 300, or whatever that that number is you’ve got the long term capital gains plus the depreciation recapture. It’s a pretty significant tax amount. And, you know, so that’s, that’s where I think the the interest, you know, really starts the 1031. I appreciate you kind of laying that out, because those are the mechanics and I think that the thing that I’ve heard and I’d be curious to know if you have any additional insight, but I think there’s a lot of people that have heard of a 1031 but don’t always understand, you know, what’s involved. The best advice I’ve heard is that if you think you’re, you might want to do a 1031 that’s exactly the time you shouldn’t get A Qualified Intermediary to come to understand what’s needed in order to, you know, make it happen properly. You can’t wait till the Day of closing and say, I think I want to do a 1031 where you can get through, but it’s not advisable. I think that laying the groundwork for a successful is a better plan than just, you know, a minute or two before you’re signing.
Jason Salmon 22:26
I agree with that. Yeah, I mean, my experience, I’ve even had people come to us years in advance, because, you know, again, based on the fact that a major part of our business is the 1031. You know, we can kind of help map that out a little bit, just broad strokes, you know, kind of with the intent to maybe, you know, gain some focus on what, who’s who, and what’s what, what the, you know, timing should be, etc. But you’re right. I mean, certainly I’ve also had phone calls with people that said, You know, I want to do a 1031 and I sold last Week and my first question is, where’s the money? They’re like, to my bank account. I’m like, you gotta speak to your tax person. But, but you’re right, I mean, usually approaching a sale. One, you know, if they are planning properly, you know, would want to consider what, you know what might be next. I mean, you know, once somebody sells an event, you know, already has a contract to sell a property. I mean, depends how quick the closing is, but let’s just call it 30, 60 days, that should be ample time to consider, you know, what, what might be next. And I think that, you know, if nothing else, it’d be short sighted to say that they’re going to be buying additional investment, real estate, yet post tax with having had the ability to do a 1031 exchange all along. It’s really not that big of a deal because again, enlisting the help of professionals. This is a major major industry. It’s a big part of of real estate investing, with all the respect for people that might be hearing this for the first time, because they never needed a vehicle, like a 1031 exchange or never had to think about these things. It’s something that again, when you start considering what the potential tax liability is, when you tally all those numbers up that you were referencing a few minutes ago, it could be a pretty bitter pill to swallow. So, you know, those those, those are the things to consider. I mean, you know, are they going to stay in real estate? Do they have other things that they want to do? What are they looking to do post tax versus, you know, conducting the 1031 and then keeping those funds working for them, and hopefully throwing off some income, potentially.
And then, of course, you know, what’s, what’s the bigger picture? Are they, you know, are they looking to you know, kind of take the money and then pay their taxes and be done with real estate investing or you know, is this, again, kind of a long term strategy, multi generational, etc, etc, kind of what are they? What are they looking to accomplish in the grand grand scheme of things, but last minute, you know, it certainly is doable but not advisable.
J Darrin Gross 25:20
Right. You mentioned kind of the generational thing I guess, as a real estate investor myself, I’ve always thought of real estate as a long term play. And when I find that there’s a, there’s a large contingency of investors that are more syndication focused, that don’t necessarily recognize the nuance of depreciation. write off as as greatly as somebody that that has been in a single property for a long time. I’m kind of curious, do you have any sense of and I don’t need specifics, but I was just I don’t know if you can speak to this or not if you can’t so be it. As far as the the average person that comes to you, and the length of time that they’ve been in a property, is there any sense of that or a range? Can you speak to that at all?
Jason Salmon 26:17
I mean, yeah, I’ve been I’ve, I’ve seen people that have owned things for me. And you’re right on, by the way, because, again, the depreciation recapture, you know, it doesn’t necessarily kick in, you know, depreciation itself. It’s all about basis. So if one is working off of straight line depreciation for residential, it’s over a span of 27 and a half years in commercial 39 years. So, you know, depending on how long one is owned these properties, then it does have some bearing but somebody could certainly have owned something for only a handful of years, that just for one reason or another is highly appreciated. And as a result of that, you know, they might have a potentially huge tax burden just on the gains themself. That’s their own motivation.
But I think you’re also right. Many of my clients have owned their investment properties for quite some time. In fact, many of my clients also have done 1031’s, and they’re just coming to me on it kind of, never really, I don’t know if this is really terminology or not, but a, an a next generation of 1031. They 1031 before, you know from a property that’s long gone, they were in another property, they 1031 to get into that, and now they’re coming to me, because they want to diversify. They want to be hands off, they don’t want to chase tenants around or deal with asset management and timing the market for sale. And that’s kind of why people that’s motivation, people coming to me, but yeah, I mean, I’d say to Jeff, I’ve seen I’ve seen corporate documents that looked like they were made of dust before because that’s kind of part of our process to find kind of you know, accompanying documentation and this corporation went back to way back when, and indeed it had owned real estate. And then, you know, literally generationally getting passed through. But I’ve seen people that have owned real estate for 40 years, I’ve seen people that have owned real estate, for five and anywhere in between, and in the cases that I mentioned before, somebody could have just, you know, kind of hit it right. And in got an opportunity made a whole bunch of, of profits just off of the, you know, when they recently bought it and how they’re selling it. And, you know, they’re they have a motivation to do a 1031 because they believe it’s in their best interest. And, you know, they do it. So, but you’re right, the longer one owns the real estate, it’s the combination in many cases of the least the motivation is the depreciation recapture tax, which is, which is, you know, could be pretty painful. And then the and then the capital gains, and the other ones that we kind of mentioned a little bit earlier in this conversation, but it all adds up. I mean, it, you know, again, I don’t want to fight a number per se, but, you know, I guess really you just have to consider that if one has to pay their taxes by not doing a 1031 exchange. I mean, let’s just talk, you know, General numbers, if somebody sells something for a million dollars, and they have a potential tax liability of $300,000. You know, that’s, that’s significant, you know, if that’s what that person’s situation is, you know, if somebody is selling something for $5 million, and they have a seven figure potential tax liability. I mean, it’s really just a question of, you know, what the motivation incentive is to, you know, stay within the real estate universe. If one is able to, you know, to enact The 1031 exchange because again, those are significant numbers. I mean, in and of themselves are large numbers, but we’re talking about, you know, to continue to have that number working for you, or to just, you know, pay it in taxes, have it be water under the bridge and then go on to the next adventure. You know, I can’t make that decision for people. But I certainly know from my day to day, what I think, you know, makes sense, but not always people have to make that decision for themselves. They have to consult with their, their advisors on, you know, on how that looks. And then certainly from a professional standpoint, it’s part of my job to help with that process as well.
J Darrin Gross 30:41
Got it. What I asked you quick about the, you know, part of the 1031 exchange requires that the seller of the property, be the buyer of the the replacement property if I’m selling one property and I own it as an individual or an LLC. However, the replacement property, I’ve got to have the same chain of title, the, the, you know, entity a or or individual a has to be the buyer on the second property is individual layer or LLC or entity a. Can you explain how on a property with a Delaware Statutory Trust and maybe we should back up for one second, just explain what is what kind of properties are held in a Delaware Statutory Trusts and then talk about the, the the way you know, how one’s able to maintain that, that seller, buyer status?
Jason Salmon 31:51
Yeah, I’ll make it very easy. I’ll we’ll address that question straightforwardly, and then I’ll build that out. With respect for Delaware Statutory Trust. Fact of the matter is in the paperwork that I have for my clients as investors, there’s a place if you can own real estate any which way you can own real estate within a Delaware Statutory Trust in that same way. If it’s a corporation, I have clients that are corporations, if you’re an LLC, I have clients that are LLC’s, partnership, joint tenants with rights of survivorship, individual husband and wife, if you can own real estate in that way, and that’s how you sold your real estate. And that’s how you need to buy your real estate as replacement property. That’s, that’s a okay. That’s there’s a place for that it works the exact same way. But for the fact that you own what’s considered a beneficial interest in a trust a Delaware Statutory Trust. So you go in buying the replacement property if you buy into a DST or DSTs plural, case by case in that exact same way so that that would be no issue. No problem. You know, I probably right now I have clients of all stripes that are those types of entities and individuals that I just mentioned a few seconds back. As far as the structure itself, the Delaware statutory trust in and of itself is a trust. And that is how the real estate is owned. Now, somebody doesn’t come to me and say I’m investing with Jason I’m investing in in a DST, and then magically, they are in, you know, a bucket, or a portfolio of various real estate. That’s not quite how it is. So with the Delaware Statutory Trust, again, it’s a structure the trust owns, or it’s the trust that owns a real estate, and everybody in it, as fractional owners are members of that trust. So a DST itself could be a single property, it could be a portfolio of two properties, three, eight, I’ve even seen 20 plus properties in one DST. That doesn’t happen every day. Because again, just to frame this, our company we work with probably at this point over 30. asset managers, very large companies, they’re the ones that are buying the real estate with their money in the format of a Delaware Statutory Trust,
That and again, they could be four properties as one Delaware statutory trust, it could be a single property. And they’re pretty large, I mean, 10s of most cases, 10s of millions of dollars. I’ve had properties deals that were hundreds of million. And I have had modest ones that, you know, some very high net worth investors have no problem owning a five or $10 million property. But the beauty of the dollar is that story trust is the ability to diversify, and also to be hands off and passive. So those are the biggies and maybe we’ll get into that a little bit later. But these firms firms that we work with go out they buy the real estate. And the deal is the deal is the deal. If the single property there’s nothing happening underneath it, that is what the investor ultimately is investing in, albeit fractionally, but just because somebody goes out and puts together a DST and buys a 300 unit apartment complex that way, or a single tenant net lease, Walgreens, or a corporate headquarters building, to a fortune 500 company or whatever, because again, they could be various asset classes. It could be, you know, let me let me touch on that also could be multifamily self storage. I eat these days you don’t really see traditional retail like what we call anchored retail kind of Neighborhood Center, which means that you have a grocery and a little bit of inline space in line space being like your barber shop pizzeria, nail place, that kind of thing. Community Center, that’s where you have a few more big boxes, but you all We’ll have that in line space that we referenced again, you know, you name it, maybe a Chinese restaurant, pizzeria nail place, Hallmark store, whatever, whatever it might be. And then you get into the power centers, which is all the big boxes. And then you get into what we call regional centers, and that’s malls. But I can tell you from experience, it’s been a really long time, since I’ve seen anything like that, at least in what I would consider the mainstream DST market years. And again, for obvious reasons, but single tenant net lease real estate, like a pharmacy, or like a medical building, or like a distribution center. These are the types of things that might be considered kind of pseudo retail. But really what you’re investing in when you’re investing with that, if you have a corporate guarantee, is the creditworthiness of the tenant and the lease behind it. Because that’s just kind of a different thing. And you do see that from time to time with Delaware statutory trust many people like like, just buy, you know, net lease real estate or triple net Real Estate’s true, but the great thing about when, when I do my job is I know that I can help my clients to diversify. And instead of having to have any concentration risk and buy the whole thing, they can own a portion of it and also other things. So, you know, multifamily Self Storage, like I mentioned, you do see more industrial and distribution now more than ever, certainly healthcare more now than ever. I think the last statistic that I remember was 10,000 baby boomers retiring every day. So obviously, it’s important health care related, just depends on the sign of, you know, the times. But, you know, again, it’s real estate, there’s always risks, and you just have to consider kind of how these are looking.
You know, as far as the real estate is concerned, one important point about the 1031 is that one has to buy equal or greater value. We talked about the light kind . With 1031 exchange you have to buy equal or greater value. So if you sell a property for a million dollars, let’s just assume without a mortgage on it, you have to buy a million dollars or greater of total real estate value example be, you sell a property for a million dollars and you pay a mortgage back of $400,000. Your $600,000 goes and sits in escrow with your Qualified Intermediary, that 600,000 still has to buy a million dollars equal or greater, to pull off the 1031. Otherwise, it’s called boot. And specifically in the case I mentioned mortgage boot, and that’s taxable. So you have to buy equal or greater value with the Delaware statutory trust. These DSPs come already, either with or without debt already attached to them. So it’s really important for people doing a 1031 somebody needs a mortgage. The great thing about DST is is it’s already attached to it, you know, any given deal that already have the dead on it, and the great Further is that it’s not recourse to the investor so they don’t have to sign for it. So that’s again, another way to kind of maybe potentially alleviate a burden for people and sort of free themselves to kind of live their life moving forward, you know, and on down the line. So it’s really important to note that structurally, with the DST, if there’s debt on it, it’s not recourse. The deals either come with or without debt. And the way our firm is set up is we work with, like I said, a few minutes ago, over 30 firms, they’re going out and buying these very large real estate deals. And then just because they have to deal doesn’t mean that it sees the light of day at least from our firm. So they come to us and we conduct a very stringent and thorough due diligence process. And when that through either the deal will or won’t be offered to our clients. If the deal does not pass our due diligence we do not offer to our clients. If a deal passes the due diligence, then it’s one of you know, Maybe 30, 40, even 50 and beyond deals at any given time that one of my clients has the opportunity to participate in. So, you know, it’s really a very collaborative decision. When I work with my clients, we talk about the deals, we talk about who’s running it, we talk about what their exit strategy is, it’s that’s another important point. You don’t go into these deals, and then you’re in them forever. There’s, you know, there’s an exit strategy, because these are 1031 vehicles. It’s not just like, you go in and then, you know, wake me up in 30 years, it’s not really how it goes. Usually, when these asset managers own the real estate, they might, you know, put an exit strategy in their own that they want to sell in seven to 10 years, or they want to sell in five to seven years. So people would know going in kind of what we’re looking at here, as far as what they have in mind to sell but ultimately, because these are passive investment Is the asset manager running the deal that makes the decision on when and how to sell? So, that was really long answer to a short question, frankly. And I know you asked me about structurally how it works. So entity wise, however, somebody owns their real estate that they sell, that’s if they do DST’s or frankly anything else, that’s probably that’s gonna be how they buy their replacement property. When it comes to the Delaware Statutory Trust itself. You’re in, you own a fractional interest, it’s called a beneficial ownership or beneficial interest. It’s units of the larger real estate deal.
J Darrin Gross 41:41
Got it? Now, I appreciate you running down that because I if you hadn’t I was going to ask you and I think the the thing that I wanted to reiterate there was that Kay Properties is not a deal sponsor but more of a vehicle to to provide access to the different deals, is that correct?
Jason Salmon 42:03
That’s right. Yeah. Yeah. So we work with these firms that are putting out, maybe between one or three, four or five even deals at a time, maybe beyond maybe none. Maybe they’re just waiting. And, and so when, when I’m working with clients, I’m, you know, while I have relationships with these managers, and I know who they are, I know that humans behind, you know, what they’re doing, why the way that our company is set up, is that, you know, we really work with our investors, because that’s kind of what we’re looking at here. It’s, that’s the role that that’s the pure relationship. It’s between us and the investor. Looking at these other deals, I mean, certainly these asset managers would love all of our clients to go into their deals, you know, every every single time but that’s just not how it works. It’s a phenomenon that we call suitability. So it’s really just the spirit of knowing that just because there’s a deal that’s out there doesn’t mean that it’s the best deal for every person, it just would be the right deal at the right time for the right person. And that’s part of our process, over time of getting to know people, and investors, when in the same for what they’re trying to do, to find them, the right deals to go into. And that’s, I think, a great advantage of our company and the platform we have, because we have so many relationships with so many of these asset managers to have the options, you know, to find the one that’s, you know, the one or the few that are just right, I mean, the, you know, somebody could if I had 30 deals at any given time, just because somebody wanted to diversify into those 30 deals, doesn’t mean that that’s the the right idea of the best idea. Because diversification for the sake of doing it is his sound, and a big part of my business and what I like my clients to accomplish. But just to go into deals to go into an extra deal, if that extra deal doesn’t make sense, then it doesn’t make sense. So don’t do it. You know. So that’s, that’s the thing. But for one reason or another, the deals that we have, I probably have clients in, in most, you know, as they come and go, you know, for one reason or another, again, it’s kind of the right thing at the right time for the right investor. So, you know that that’s a big part of it. But the place that we, the role that we play, is, you know, it’s securities. So that’s how I do what I do, but I don’t do stocks, or bonds or mutual funds. I do all private equity real estate all the time, with a bit of a specialization for 1031 exchange. But I do have a good amount of direct cash investors that prefer to own their real estate through, you know, this destructure in this channel
J Darrin Gross 45:04
A couple of questions. You know, and I think this relates based on the fact that you guys continually have sponsors providing you new deals that they’re trying to fund and or that are available for the DST investor to get into in the one of the important things I guess to understand is that as somebody gets into one, and you mentioned the prospectus, and the plan is to get out eventually, the important the importance of the fact that you will have additional opportunities for them when that time comes to replace that so that they won’t be faced with this, you know, what do I do kind of thing, that there’s the ability to continually roll that money and maintain that deferral on the tax from the original investment?
Jason Salmon 45:54
Yes. So, that With that said, You’re exactly right. So it’s Really important to note that for people that participate in Delaware statutory trust for their 1031 exchange, one of the great things about you know, the the way that this has been been put in place to revenue ruling 2004 dash 86 is you can 1031 in, and you can 1031 out and that’s when it ultimately sells. So when and I just had this happen three weeks ago, I think at this point at a handful of clients and a deal. It was actually sold after three years with a profit for profit. And, and leading up to that sale the investors in that deal. were contacted by an investor relations from the asset manager running it saying, hey, look, you know, it’s selling, you know, this is the timeline. If you’d like to do a like kind exchange 1031 exchange, please relay the contact information for your Qualified Intermediary, and that’s where they send the proceeds at closing. But further still, it’s really important to know Note that if one chooses to vote to go that route, it’s not they don’t, they’re not stuck in DST’s. So a few things with that one, if they don’t want to do another 1031, they can take their money and pay their taxes
Two, if they choose to do a 1031, First one doesn’t automatically roll into whatever deal is next. People might say that Yeah, just put me in whatever this asset managers neck deals are or dealers, that is not how it works, you actually have to go out to go back in so your money still does have to go to a Qualified Intermediary. And mechanically, you’ve got to do the 1031 exchange, kind of like we talked about earlier. They don’t put your money to a Qualified Intermediary and say, guess what, we sold it. You’re in a 1031. They don’t say hey, we sold it and now you have to pay your taxes. So they fully reach out, to let people at you know to ask them how they want to go next. And so with that said, if somebody doesn’t want to do dfts anymore, and they’re in a 1031, they can go buy another rental, you know, deal with their tenants, they can go buy a commercial property, you can do another 1031 when a DST sells, but in my experience, you know, this is that the industry has only grown. And, you know, with enough time and planning, it just gives people more and more options. So, I, you know, nobody can I had a crystal ball, you know, be a whole different story and nobody knows what the future will hold. But, you know, based on experience of mine, I have clients that have come out of DST’s that have sold for them. There have been deals, you know, and plenty of them as options. You know, again, the mechanics still go and apply. You know, do you Or don’t you need debt for your 1031? You know, what is the timing? What are the deals that are available, how much equity is left in the deals, you know, based on the timing and, you know, then we talk about the 45 days and the other timeline. So, those are all things that when we work with clients, we figure it out. But one does have the ability when a DST sells to do a 1031. And it is their option, how they want to go next. But I think you would ask about availability, and DSTs and 1031 vehicles for when they come out. In my experience. You know, every single time I’ve had somebody come out of a DST, there’s been, you know, at least a few dozen deals as as options generally speaking,
J Darrin Gross 49:44
Right. The one thing we haven’t really talked about, we you mentioned about the equal or greater then can you speak a little bit to the individual that has they’ve sell one property, it’s, say, $500,000 they’ve got this one deal that they want to do that’s maybe 300,000 they’ve got this balanced this 200 that they need to do something with or pay the tax. Can you speak a little bit to that?
Jason Salmon 50:16
Yeah, I mean, that’s, that’s, that happens from time to time. And it’s, I think that’s a really valuable tool for people. You know, to maybe can, you know, if you will have their cake and eat it too. I mean, you’re exactly right, somebody sells something for 500 they have their heart set on something for 300 placing the the remaining 200 could get, you know, may extend themselves just based on what they want or need. And rather than have to meet, you know, rather than that the boot in unplaced, 1031 funds, the dfts are really valuable for being the right They’re for that. So and I have that happen all the time, where people are buying something on their own people even use bsts as a backup, just in case, as long as they kind of follow the 1031 rules, which is nuanced. And, you know, we could probably speak for an hour and a half about that. But, um, yeah, I mean, your example 500 with, you know, somebody buy something for 300. And they need to place the 200, then, you know, we just kind of, you know, lay everything out, we determine what’s what, you know, figure out how much certainty of closing that they might have on that piece, but they’re buying what the timeline is. And then, you know, with that $200,000, figure out if they want to go into a deal or two.
And, you know, like I said, it happens pretty regularly for people that do that, although I will say once people start getting a sense of the passive nature of it, if they’ve kind of reached that point in their life where they just don’t want to have to do do with it all? Or they don’t want to have to deal with the stress of will or won’t they be able to close? And you know, will the seller perform while the seller tried to retrrade them, you know, at the 11th hour, even after they’ve identified, sometimes people once, you know, once they learn about dfts and get a comfort level with it, you know, do make a decision to kind of go that route, but it’s not the end all be all, anything mean, if somebody needs to buy something for, you know, $3 million, they’ve sold something for 3 million and they find something for 2.9 and they have $100,000 they’re going to be taxed on and if they don’t do it 1031 you know, I’m Johnny on the spot, you know, with situations like that. It’s a Okay, it works out. I see it all the time. And and it’s certainly doable.
J Darrin Gross 52:48
Well, and you mentioned DST as a backup, I think that’s something that’s worth reiterating. Given the the timeline that you referenced earlier and that 45 days to Identify, and the identification, if I understand correctly is you have to identify three properties, or three, three options. And then you have to close from those three, you know, you can’t, you know, bring 10 more and and it’s it’s there is a limitation on the number and the options available. Is that said, your understanding or is it consistent with what you were looking for?
Jason Salmon 53:28
Yeah, that one of the rules is the three property rule that basically says that one can identify up to three properties, as long as they can close on one, two or three, as long as they’ve identified them. And they by equal or greater value, another one of the rules, which by the way, they don’t all need to be followed simultaneously. It’s one or the other, the other. Another rule is called the 200% rule. And that basically says you can identify up to 200% of the value Your relinquished property. So that, you know, that does play into it. Sometimes with people that do DSTs when you think about it, you know, if you’re if you sold something for $2 million, and you identify three properties that are $2 million, that’s 6 million right there, use the 200% rule, you’re at 4 million. So it really just depends on kind of how you’re looking, and kind of really what you’re trying to do. But if you sold something for 2 million, and you’ve identified one property for 1,000,002 properties for 500, then, you know, it just there’s some variants there. There’s also another role called the 95%. Basically, you can identify whatever you want, but you must close on 95% of it. So that’s a tricky one. And the conventional wisdom is that that one is not often used, but but it is sometimes. So it just depends. We have pretty deep familiarity with how these rules are applied. With the timelines. So, if somebody is using a backup, if somebody is using DSTs, these are things that do factor and again, nuances like does the deal have debt or not have debt? Does the investor need or not need that for their 1031? You know, I have somebody right now, who is going into a DST with debt, but he’s buying a property that’s hands on without that. So that, you know, probably because of what I mentioned a little earlier in this conversation about the financing, be not non recourse to the investor. And this particular gentleman needs debt for his 1031 exchange. So, you know, he’s, that’s how he’s going. You know, I’ve, I’ve had, you know, I’ve seen a lot of different scenarios, based on my experience. Our firm helps clients by hundreds and hundreds of millions of dollars of real estate year over year over a year, and we kind of we feel a lot different situations. So, you know, I’ve seen each of those rules applied for 1031 exchange for identification. And, you know, as long as there’s kind of open dialogue about what the investor is trying to accomplish, you know, we can we can pretty much let them know, you know, what fits within the parameters of 1031 exchange, and identification and, and what’s, you know, not possible. So we will help with that we work with people as well.
J Darrin Gross 56:29
Yeah. Jason, if we could I unless there’s something that you feel like we’ve left out, I’d like to shift gears here. Are we do you think we’re at a good point there? I mean, based on the we’ve touched on the 1031. We’ve kind of walked through the different asset classes and the opportunities and DSTs Is there anything that that we that we should have the you you were waiting for me to ask you about?
Jason Salmon 56:58
No, I think we’ve covered a lot I mean, I think we, you know, maybe listeners can tell I, you know, I could probably talk about, you know, this stuff, you know, probably for another 10 hours, which I do, usually day, day by day. So, but you you cover the important points. I mean, it’s, uh, you know, it’s a very specific thing. It’s not that easy a topic, you know, to just automatically conceptualize, you know, commit to memory and understand, and that’s why when we work with our clients, it’s education is big for us. So, you know, that’s a process leading up to everything. And so I, you know, certainly I’ll make myself available to anybody that wants to know more about it. But I think we covered a ton of information. I think we, you know, we laid out kind of how a 1031 exchange is, we laid out how the DSTs fall within it, and how it might apply For real estate investors, and I think we’ve covered a tremendous amount of territory on this call.
J Darrin Gross 58:06
Agreed. Jason, if we could, I would like to shift gears here for a second. As I mentioned to you earlier by day, I’m an insurance broker, and they work with my clients to assess risk and determine what to do with the risk. There’s three different strategies that we typically consider when managing risk. The first is can we avoid the risk? Next, if we realize we can’t avoid it, is there any way to minimize the risk? And then if neither of those are options, we look to see if we can transfer the risk and insurance is typically the vehicle to transfer the risk. And I like to ask my guests if they can take a look at their situation. You can look at both your you know your professional situation and or your clients. And if you can identify and speak to what you consider to be the biggest risk. And for clarity, I just want to make certain you understand I’m not necessarily looking for an insurance related answer. So, if you are willing, I’d like to ask you, Jason salmon. What is the biggest risk?
Jason Salmon 59:25
Well, the biggest risk with any investment is losing your money. I mean, that’s really it. So then the question becomes how to mitigate that from there. So you talk about avoidance. And again, I’m compelled to tell people that anytime they make investments in private placements, there are risks, including what I just mentioned, no guarantee of returns, no guarantee of profits, no guarantee against losses and one can lose their money. So the way to avoid that is by not investing and you know, putting it onto the mattress, I guess, and then you have to figure out you know, what the match protected by, you know, because anytime it gets outside of, you know, under your thumb, you know, that’s, that’s one thing as far as minimizing and and, you know mitigating for me and our clients is diversification. So, you know, when one has all their eggs in one basket, they then are incurring concentration risk. So then again just because one diversifies doesn’t mean that they’re avoiding the risk, but they are spreading that risk around.
So we love the fact that DSTs give most investors the opportunity to diversify. And, you know, that’s, that’s a big motivator, and that’s part of my day to day and I remind people of that all the time. Beyond that, though, one also has to determine what their own appetite is for risk. I mean, I’ve had people tell me that they’re, you know, in a great place in life and they want to bring it on, you know, so we talked about with these deals, any of them, it’s a risk adjusted return. Now, there are deals and I don’t want to get into returns, you know, it’s just not something that we can do through this venue. But, you know, returns could be all over the board. So that’s, you know, your, what your annual returns are, and it’s a risk adjusted return. But for us, you know, it’s about you know, when you talk about diversification, we’re talking about real estate, so diversify in some cases across asset classes, type of real estate, diversify across geography. In some cases, some people love certain geography, you know, it’s okay. It’s things we talked about, and diversify across asset manager, different people running the deal. Sometimes people just like certain deals that certain asset managers are running. So That’s different ways and different permutations than that when we work with clients, we can mix and match to kind of try to mitigate that risk by way of diversification. But just because people diversify doesn’t mean that they’re protected from risk. And as far as transferring. You know, for us, I can’t really claim to be able to do that, because there is inherent risk, you know, with private placements, it is available to accredited investors. So one, you know, has to have be at a certain point in life, and in the spirit of that has to be comfortable with the potential for loss. And that’s why you hear all that, you know, all those disclaimers disclosures with any investing, whether you see it kind of on a screen, or you’re working with your friendly neighborhood, financial person, these are all parts of it. And I’m sure this is part of your day to day, but yeah, I mean, there’s risk, but hopefully, you know, again, through understanding, I think that’s the most important thing, know what you’re getting into, you know, manage the risk by really understanding what’s behind it. For us. It’s real estate. So the great thing is, you know, I oversimplify it sometimes, but really, it’s just a tenant or tenants in a building or buildings and their ability to pay their rent. And or, you know, does the deal have debt on it? Could there be a foreclosure? That could be trouble, if that’s the situation? So these are things that we talked about, what are the chances that happening? Something on, you know, without alone on it, you know, what does that mean? What’s, what’s kind of what are some worst case scenarios from a real estate standpoint, you know, as they weigh into each of these respective investments, but again, with any investment, you know, one does have the risk of losing principal.
J Darrin Gross 1:03:57
Now, that’s well said and, and It’s always a risk. So I appreciate you sharing that. Jason, where can listeners go if they’d like to learn more or connect with you?
Jason Salmon 1:04:08
Yeah, I’m happy to have direct dialogue with anybody, anytime. The most efficient way to get to me and hopefully that will get us to the point to get on the phone but simply emailing me at Jason@KPI1031.com is the best way to find me and to you know, find time to exchange telephone numbers to get on a call, talk about the situation and you know, kind of figure out if we if we can help also our website is KPI1031.com.
J Darrin Gross 1:04:50
Yeah. Jason, I want to say thanks for taking the time today. I’ve enjoyed our time and learned a lot and I hope we can Do it again soon.
Jason Salmon 1:05:02
Well, you’re welcome and thank you for having me. I appreciate it too. And I thought it was a great way to spend, you know, some time talking about my day to day. So thank you.
J Darrin Gross 1:05:14
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