All Forum Posts by: Lauren Brychell

Investors seeking to optimize their assets, defer taxes on large capital gains, and secure their financial future often explore various trust structures to achieve their objectives. Two popular options that have gained prominence in recent years are Delaware Statutory Trusts and Deferred Sales Trusts. While both share similarities in their tax-deferment capabilities, they are unique in their design and application.

Breaking Down Delaware Statutory Trusts

Primarily used for real estate investments, Delaware Statutory Trusts allow investors to pool their resources to invest in high-value, large-scale commercial properties. A legally recognized entity under Delaware state law, this structure offers an opportunity for portfolio diversification and acts as a tax vehicle for tax deferment on large capital gains, making them a popular choice among 1031 exchange investors.

Delaware Statutory Trusts are generally applicable to real estate investors who are looking to execute a 1031 exchange — a tax-deferred exchange under Internal Revenue Code Section 1031 — and diversify their property holdings. However, this type of trust forgoes the Tenant in Common agreement commonly associated with 1031 exchanges.

In a Delaware Statutory Trust, investors have limited control over the property since management decisions. Delaware Statutory Trusts are typically managed by professional asset managers or trustees, who handle property management and operational decisions on behalf of the investors. This means investors can enjoy passive income without having to bear direct responsibility for property management tasks.

In addition, Delaware Statutory Trusts usually offer tax benefits through depreciation deductions and the ability to defer capital gains tax upon the sale of the property. However, when the property is eventually sold or the trust is dissolved, the accumulated taxes will most likely be due.

Deferred Sales Trust

A Deferred Sales Trust, on the other hand, is a specific tax strategy used to defer capital gains taxes on the sale of highly appreciated assets including real estate, businesses, and even stocks. Classified as an installment sale under section 453 of the IRC code, this structure is not a distinct legal entity like a Delaware Statutory Trust but rather a contractual arrangement between the seller (taxpayer) and a third-party trust.

The main goal of a Deferred Sales Trust is to defer capital gains taxes that would typically be incurred upon sale. Assets are not directly sold to a buyer for profit, but instead, are sold via an installment sale to the trust for a promissory note. By transferring the property or asset to the trust or completing an installment sale, the seller can defer taxes on the capital gains indefinitely and enjoy potential investment growth on the entire sale proceeds. Taxes are paid incrementally as the seller receives distributions from the trust, providing the opportunity for further tax deferral and potential tax savings.

A Deferred Sales Trust can be utilized by any taxpayer looking to sell highly appreciated assets, including business owners, real estate investors, and shareholders of valuable stocks. It provides a viable option for individuals who do not qualify for or wish to pursue a 1031 exchange. In addition, the seller has more control over any investment decisions. Though the sale proceeds are transferred to the trust, the seller can direct the trust's investments based on their risk tolerance and financial objectives.

Both Delaware Statutory Trusts and Deferred Sales Trusts offer distinct advantages and cater to different financial objectives. Delaware Statutory Trusts are suitable for real estate investors seeking to diversify their holdings and achieve tax-deferred growth, while Deferred Sales Trusts are more versatile — allowing sellers of appreciated assets to defer taxes while maintaining control over their investments.

Understanding these differences will empower you to make the right choice based on your unique financial goals and circumstances. As always, it is essential to consult with a qualified financial advisor or tax professional before making any significant financial decisions.

**This is not tax or legal advice as I am not a tax professional, just some insight into the tax strategies around DSTs vs. DSTs.

It is a challenging time to find profitable deals on existing self-storage facilities. Interest rates are steep, and banks are backing away from financing, making it harder to secure loans. Meanwhile, because storage is still recognized as a strong asset class, property values have remained high, leading to compressed capitalization rates.

Fewer deals are coming to market, and for those that are, it is becoming increasingly difficult to negotiate terms that leave both the buyer and the seller satisfied.

However, while acquisitions may be slowing, the market is ripe for opportunistic ventures like ground-up development. To understand why, we need to take a deeper look at one of the metrics we use to assess a project: the yield-to-cost rate.

Unpacking Yield-to-Cost

The yield-to-cost rate is essentially an operational cap rate. It measures the expected return on investment by weighing the estimated income from a completed project against the initial cost basis. Whereas cap rates have stayed relatively low, the yield-to-cost rate on ground-up development is trending upward.

That means that, at the moment, it can be more profitable to build than to buy. We're currently seeing ground-up projects averaging a yield-to-cost rate of 9-11%.

There are several reasons for this. Fully-developed storage facilities are expensive, but there are opportunities to purchase affordable, well-positioned land in regions with elevated rents and substantial population and wage growth. Although property values are climbing, construction costs have remained stable.

Lastly, when developing or expanding a facility, the operator has more control over the outcome. This enables operators to focus on amenities and features that attract tenants and drive up rates — leading to enhanced profits once the location is open for business.

Economies of Scale

A high yield-to-cost rate is not the only advantage when it comes to ground-up development. Consider having an in-house construction team that is licensed in multiple states, which helps provide all the benefits of a national builder combined with deep, local knowledge of the markets you serve. This would allow you to retain complete oversight of construction, helping control the value chain and mitigate risk.

Multiple Exit Strategies

Ground-up projects also provide several exit strategies. You can buy and entitle a property and flip it, or build a facility, obtain a certificate of occupancy, and sell it empty. Or finally, you can lease up and stabilize the asset.

Every location is different, and the optionality of having multiple exit strategies allows you to adapt to the market, remain agile and achieve the maximum return on investment for every deal.

Even when conditions are favorable, prioritize a proactive approach to due diligence and mitigate risk by structuring the purchase agreements so you only close with full entitlement approval. That means money only changes hands once you're certain that planned development can move forward.

I hope this article provided some insight into building value during uncertain economic times. Thanks for reading!

A high-interest rate environment can have different implications for investors depending on how they position their assets. For those holding fixed-income investments such as bonds or certificates of deposit (CDs), rising interest rates can mean higher returns, boosting cash flow.

On the other hand, those looking to secure debt — for example, to finance a home — are in for a challenge. In 2021, the average rate for a 30-year mortgage was 2.96%. That figure soared to 5.34% in 2022 and through the early months of 2023, rates have fluctuated between 6 and 7%.

While we cannot know precisely where the economy is headed, there are steps that investors can take to ensure their money is working hard for them. Let's discuss the climbing interest rates and unpacked strategies for staying ahead.

Since 2020, we have experienced significant geopolitical conflict, a pandemic, major supply chain disruption, and record inflation. At the end of 2021, the overnight borrowing costs were close to 0%, and purchasing power was high. This was driving up demand for assets like property.

To combat this, the Fed announced that it would be raising interest rates. At the time, most financial commentators predicted 1-1.5% increases. In fact, today's federal funds rate sits between 4.5 and 5%.

All things considered, the relative stability of the current landscape is a testament to the resilience of our economy. Whether or not the Fed can achieve a "soft landing" — whereby the economy slows down enough to drop to the target interest rate of 2% while avoiding a recession — remains to be seen.

While high-interest rates are challenging for borrowers, they can be a goldmine for investors. The cost of debt is up, but so are the returns on products such as high-yield savings accounts and CDs.

With news of the Silicon Valley Bank and Signature Bank collapses still top of mind, banks are actively courting deposits, and many are willing to pay highly competitive interest rates — often upwards of 4%.

Contrast that with an investor keeping excess cash in a 0% checking account. They could be leaving money on the table simply by failing to take advantage of the opportunities available to them.

We have navigated high-interest rate environments before. What makes this moment unique is the state of the yield curve.

Yield curves plot the relationship between interest rates and maturity dates of a particular asset. A "normal" yield curve is upward-sloping, meaning that longer-maturity bonds offer a higher yield when compared to shorter-term bonds. However, the current yield curve is inverted, meaning that interest rates for long-term bonds are lower than those for their short-term counterparts.

The same is true in the CD market. Consequently, investors shopping for CDs are likely to find much more favorable interest rates on three-month CDs than they might on a five-year deal.

Investors are used to navigating the "normal" yield curve and expect to sacrifice liquidity for higher returns. For now, that relationship has been turned on its head. As a result, vehicles like debt funds — which offer a high yield on a longer time frame — could be a more attractive option than a CD.

With rates on the rise, interest arbitrage can be a powerful tool to help investors get the most out of their money. American households owe a total of $16.5 trillion in debt, and the average U.S. household has a debt balance of $165,000. For many, paying off debt — especially mortgage debt — is a core financial goal. Yet making aggressive early payments could actually hold borrowers back.

Interest arbitrage is a strategy where investors simultaneously balance assets and debt to drive a profit. Millions of Americans refinanced their homes over the past two years, securing 2-3% interest rates. For those holding low-interest debt, paying over their monthly payment may not be the most effective use of income. Suppose a mortgage note is at 3%. If the mortgage holder can earn more than that with their investments, they will ultimately derive the most value by maintaining the debt and leveraging their money elsewhere.

A high-interest rate environment provides a unique opportunity to build wealth. As such, a "pay yourself first" philosophy can prove particularly fruitful.

By participating in a high-yield opportunity such as a debt fund, investors can leverage their earned income to generate a new source of cash flow. They can then use that money to support regular expenses, be it a luxury, like a car, or a necessity, like their mortgage payment. Or they can reinvest to augment their returns further.

I hope this gave some insight and context into what is going on in the world, if you have any questions about the above, please reach out, and thanks for reading!

Join the Spartan team in NYC to meet and mingle with like-minded real estate investors. We hope to see you there and please reach out to [email protected] with any questions or to RSVP. 

Amidst the current economic uncertainty, are you as an investor prioritizing cash flow or appreciation in your passive, or active, real estate investment strategies? And how are you adjusting your usual investment approach to balance short-term financial stability with long-term growth potential? 

Tax season may be a few months away still, but what should you expect if you're a first-time limited partner?

As an equity investor, you will receive a K-1 from your operator/sponsor. The Schedule K-1 is typically between one and four pages long and reports your share of income, losses, and dividends.

As a rule of thumb, you should receive one K-1 per investment unless your sponsor files composite returns. 

In your first year of investing, you should see losses from depreciation. One of the most significant benefits of investing in real estate is depreciation and it allows you to write off the cost of the physical devaluation of a property — all while your asset is likely gaining value in the market.

This is the last year (2022) for the 100% bonus depreciation tax benefit introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. Starting in 2023, this will drop to 80% and fall another 20% every year after.

Now is a great time to reach out to your sponsor and ask when you will see your K-1 for 2022. The anticipated delivery date may inform whether or not you file for an extension. Filing for an extension is typically a no- or low-cost option that removes the stress of gathering multiple K-1s or 1099-INTs before the April deadline. This, in turn, can reduce costly errors or omissions. As a wise accountant once told me, “It’s better to extend than amend!”

If you have invested in private debt opportunities, you will receive a 1099-INT. Your 1099-INT will list the amount of interest earned in the tax year. Per the IRS, you must receive your 1099-INT no later than January 31, 2023.

Make sure to review this document for accuracy as soon as you receive it. Check with your CPA to ensure that your operator has your correct taxpayer identification number (TIN) and entity name, as there will likely be a delay in filing to make corrections.

Likewise, if you are planning on any entity transfers, don’t wait until the new year — start getting your paperwork in order now.

Have you invested in a syndication, private debt, or a fund this year? Here are some steps you can take to get organized ahead of your filing deadline.

• -Let your CPA know that you invested as a limited partner in real estate.
• -Ensure that your operator has your correct TIN, address and entity name.
• -If you are investing with a self-directed retirement account, ensure you correctly identified the TIN and titling.
• -If you expect to receive your K-1 late, communicate to your CPA that you will need to file an extension.
• -If you plan to retitle your investment, get started now.
• -Get your paperwork in order if you plan to make a Roth conversion.
• -As soon as your K-1 or 1099-INT is delivered, check for accuracy and notify your operator immediately if something is incorrect.

• March 15, 2023: Filing deadline for passthrough entities (partnerships, multi-member LLCs, and S-corporations). A six-month federal extension to September 15, 2023, is available (state extensions will vary.)
• April 18, 2023: Filing deadline for C-corporations and individuals. A six-month federal extension to October 16, 2023, is available (state extensions will vary.)
  
  

Whether you’re a new or seasoned investor, tax season can be stressful to navigate. It pays off to begin laying the groundwork early and to know what to expect.