DSTs Gaining More Attention
Delaware statutory trusts, which allow investors to own one or more income-producing commercial properties, are gaining further traction, attracting both investors and sponsors.
The DST structure has existed for around two decades, but interest in the program has increased in recent years. There were 62 sponsors with active DST offerings in 2023, up from 53 in 2022, and 42 in 2021, according to data from Mountain Dell Consulting, a consulting and research firm focused on real estate investment programs.
Fundraising for DSTs offerings, a real estate investment product that provides fractional ownership to investors through the sale of units or shares, was on pace to raise $5.2 billion in 2023, according to data provided by Robert A. Stanger & Co. and Mountain Dell Consulting.
DSTs have grown more popular among investors looking to defer capital gains taxes through a 1031 exchange since the IRS recognizes them as an eligible “like kind” replacement property. It offers an alternative to the more common strategy of investing in a single property, typically net-leased to a single tenant.
Bonaventure, an alternative asset manager with $2.5 billion in assets under management focused on the investment, development and management of multifamily communities across the Mid-Atlantic and Southeast, has leveraged 1031 exchange programs over the last several years, and completed over $240 million in such transactions in 2023, a spokesperson told Connect Money.
Bonaventure’s, investment activity, led by UPREITs, exceeded $1 billion in 2022.
“Bonaventure’s private investment partners have cited a desire to go from active ownership to passive ownership, and the firm expects to see more of this sentiment in the coming years as aging landlords look to preserve wealth via more tax-advantaged solutions,” the spokesperson noted.
Meanwhile, ExchangeRight, a provider of real estate DST and REIT investments, announced it ended 2023 as the third largest sponsor in the securitized 1031 exchange market, citing data provided by Mountain Dell Consulting. Moreover, with more than $360 million of equity in the company’s DST offerings last year, it grew its market share by over 20% year-over-year.
At the same time, Cove Capital Investments, LLC, a DST sponsor company that specializes in debt free offerings for 1031 exchange investment, showed significant growth in its capital raising efforts last year, hauling in $164 million.
The firm’s achievements not only made the previous 12 months one of the most successful fundraising years in its history, but they also enabled it to crack the top 10 list of DST sponsors in terms of equity raised for 2023, out of about 55 sponsors.
“Cove Capital’s consistent increases in equity raised and over 2.1 million square feet of real estate under management is clear evidence that our approach toward providing investors access to quality debt free DSTs and funds, with a focus on removing the risks of leverage and the potential for income and growth is resonating in the marketplace,” said Dwight Kay, managing member and founding partner of Cove Capital Investments.
“Clearly our investors and the many broker-dealers, RIAs and registered representatives that are part of our selling group, feel the same as well.”
Over the last few years, the firm has completed six debt-free DST offerings and one fund offering into profitable full-cycle liquidity events across multiple asset classes, including single tenant net lease, multifamily, data center, retail, and industrial.
Lastly, Walton Global, a global real estate investment and land asset management company, announced the continuation of their DST growth strategy in 2024 after a successful 2023. The firm raised capital for two DST offerings, which included the closing of its first retail DST – Georgia Growth 1 DST – a land-based offering consisting of 103 acres of residential land.
Walton anticipates launching 5 to 7 comparable programs this year.
DSTs could represent a more practical and flexible option to purchasing a new property that meets all of the strict IRS requirements for a 1031 exchange. Given the sector’s recent strong upward trajectory, it comes as no surprise that it is drawing more institutional sponsors.