Everything You Need to Know About DSTs (Delaware Statutory Trusts)

Aviva (00:00)
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This week on Commercial Real Estate Secrets, we have Ben Carmona. Ben is the managing partner at Perch Wealth. Ben, thank you for being on the show today.

Ben Carmona (00:29)
Absolutely, it's pleasure. Thank you, Aviva.

Aviva (00:31)
Yeah, so Ben, for the listeners, who are you and what do you do here on Commercial Real Estate Secrets?

Ben Carmona (00:39)
Sure, love it. Well, I'll tell you, personally, I live in Southern California, in Orange County, Married two kids. I've been in real estate virtually all my life. And I'm in a niche business. So I'm a financial advisor.

So I'm securities licensed, right? But I'm not your traditional financial advisor that's doing stocks and bonds and mutual funds and annuities and insurance. I'm only exclusively real estate, know, private real estate syndications. It's what I've been doing my entire career. I have a business partner who's in San Diego and also shares time San Diego and Florida. And then we have advisors around the country that

support accredited clients or high net worth clients for the most part with their 1031 exchanges.

Aviva (01:29)
Before we jump into the 1031 talk, for the listeners who may not know, what is an accredited investor?

Ben Carmona (01:37)
So, a credited investor is an investor that has a net worth of at least a million dollars excluding their personal residence.

Aviva (01:46)
Got it. And so for securities purposes, I know I'm already getting into the weeds, but I think this is really important to know. For securities purposes, why do we need to know if you're accredited in order for you to invest in a syndication?

Ben Carmona (01:53)
good.

Well, it's very important because you can't invest if you're not accredited. in the opportunities that we are involved in, right, there are other securities and syndications that are eligible for those that aren't accredited. But for purposes of the investments that we provide, you have to be accredited.

Aviva (02:23)
Understood. Now, so talk to me about 1031. So I told you I was gonna give you this question. Explain to me what a 1031 is exchange as if I'm a fifth grader.

Ben Carmona (02:34)
Right, the 1031, IRS code 1031 is the most powerful, I would say the most powerful tax mitigation structure or vehicle in the tax code. It's been around for a hundred years, over a hundred years. And essentially what it allows for is investment property owners to sell their property, investment properties, and defer paying taxes on any of the gains.

as long as they exchange the proceeds from sale to buy other investment property. And, you know, you'll see if you look up 1031 exchange, you'll see like kind. Right. if you own real estate, that's for investment or business purposes. It's 1031 exchange eligible. And you can exchange the proceeds again from sale into other like kind

which essentially like kind is a very loose definition. It's just other property that's used for business or investment purposes. So you could sell land and go into a apartment. You can sell an apartment, go into a hotel. It's just like kind for like.

Aviva (03:44)
I love 1031s. know, when I put my broker hat on, 1031s feed my family, so...

Ben Carmona (03:53)
100 % right? It's the way so much wealth in the country has been built and why the 1031 exchange is so attractive because you know a term that I'll throw around is you swap until you drop. You can continue to swap or exchange right? and say swap swap swap. Never pay tax and then pass away and your beneficiaries, your kids, whoever

can inherit those assets at a stepped up cost basis. So all the taxes you've deferred over the 20, 30, 40, 50, 60 years, they're gone. That is why the 1031 exchange is so powerful.

Aviva (04:29)
Mm-hmm.

I'm going to say that to my dad swap till you drop. He won't think it's as funny as I think it is, but it's that's I've never heard it referred to that way. that's funny. Now, you and I briefly spoke Delaware statutory trusts. What is a Delaware statutory trust and what is it in relation to a 1031 exchange?

Ben Carmona (04:37)
Swap T drop, Eddie.

Yeah, it's perfect for the title of your podcast, It's secret.

I will define the DST and then I'll take a step back and kind of tell a little story. But Delaware Statutory Trust, it's a trust, it's an entity. They were created in the 80s. They weren't set up for 1031 exchange purposes at that time. But it's a trust whereby you have one trustee that manages the trust on behalf of 499 beneficial owners. Right?

So when you take this trust and you wrap it around real estate, it creates a situation where you fractionalize ownership, right? You can have lots of investors own a fractionalized ownership interest in one or many properties. And in 2004,

the IRS came out and validated this fractionalized structure as real property ownership and therefore eligible for 1031 exchange purposes. So that's just the structure. So what are we talking about here? And what do they do? In my world, DSTs, there are sponsors and sponsors a big real estate company.

I'm going throw out some big names just so the audience may... Sponsors in my space are Apollo or Aries or Jones Lang LaSalle or Canter Fitzgerald or Inland or Pasco. There's 50 different sponsors, big real estate companies. They go out and use their resources, their capital, their relationships to acquire institutional quality real estate. That may be in the form of a...

$100 million industrial property in Raleigh, North Carolina $100 million multi-family 400 unit multi-family property in Dallas, Texas $75 million medical office campus in Orlando, Florida. So you have all these sponsors they're buying, you know institutional quality real estate and then they're you know,

They're bringing on the third party property managers, They're the ones that are going to be issuing quarterly performance reports. They're the ones that are going to be providing monthly distribution checks to investors, end of year tax returns. So they buy this real estate, they wrap it in this trust, and they turn around and they offer ownership interest to mom and pop, you and me, every day.

1031 exchange investors that if you sell your property you can exchange into one or many, right? And going back to the, and these properties are, you know, they're stabilized, they're income producing, some of them are leveraged, some are not leveraged. Totally turnkey 1031 exchange replacement property solution. And given the fact that going back to the structure you're allowed up to 499.

Aviva (07:36)
Wow.

Ben Carmona (07:56)
Beneficial investors The minimums are low right so an investor can come in invest as little as a hundred thousand dollars in most of them and so You know I give the example little missus Smith that comes to me that's selling a property in Orange County or LA or San Diego With a million or two million or five million I can satisfy her exchange obviously through investing

Aviva (07:58)
Mm-hmm.

Wow.

Ben Carmona (08:20)
I can mitigate her risk through diversification because I can put 250 here, 500 here, a million there, 250 here, 100 here, right? So you can mitigate risk via diversification by sector, real estate type, and also location. And then, you know, more times than not, we're able to improve the income that our investors are receiving.

Aviva (08:28)
Wow.

Hmm.

Hmm. Can you elaborate on that? Yeah.

Ben Carmona (08:49)
The income?

Yeah, yeah, absolutely. I would say, well, eight out of 10, maybe even nine out of 10 of our investors, they've owned real estate. They've worked their whole lives to acquire one by one and accumulate this real estate portfolio that they've managed themselves. And they were killing it when they bought it. So they bought a property for...

$500,000 and they were getting a 10 % income stream at the time. Awesome, right? Well, fast forward 20, 30, 40 years, they haven't been ratcheting up rents and so there's still, many of them are still only charging the same 10 % that they were charging back then. And so from a percentage basis, most of our clients are earning one to 3 % income relative to

the equity or the property value today. And so in our offerings, I'll give you a range. mean, it depends on the sector and the location, all that stuff, but anywhere from like five to 8 % is kind of like the range of where income is today on these projects. And so many times we're able to significantly increase a client's income. one other thing, and then I'll stop Aviva, is

These same folks that are earning much income relative to pricing, they've also fully depreciated their properties, right? So all the investors that have owned them for 20, 30, 40 years, have no more cost basis. And so all the, the little income that you're earning or they're earning is being fully taxed at ordinary income rates. And we can not only increase the income, but we can add back depreciation.

so we can increase the tax efficiency on the income that they receive as

Aviva (10:41)
I more questions. Okay. Do you have to identify your DST, like in a 1031 traditionally 45 days to identify 180 to close. Talk to me about the identification process in a DST.

Ben Carmona (10:44)
Mm-mm. I know.

Yeah, great question. it's very simple, right? And I'll just say that these properties, as I mentioned, they're already acquired and owned and stabilized. These big sponsors, these big institutions own the real estate already. So in a 1031 exchange, as you know, but for the the IRS has blessed us with this ability to defer tax.

but they don't make it easy, right? So you have 45 days to identify. And that's not easy. You gotta go out. If you're gonna do a traditional exchange, you go out and you're gonna have to source your own property and do your own underwriting and get your own loan if you need a loan. It's not easy to do in 45 days. These, very easy. You identify something today and close in a week, right? So.

I don't necessarily like this, but investors come to us on day 44 or 45 and say, you know, in a panic, these properties fell out. I don't know what to do. Can you help me? Yes, we can. We can identify quick, very fast. Right. So at the very least for your audience, you can use this product as a backup plan, which, you know, which is what I'd recommend at the very least. That makes sense.

Aviva (11:56)
Wow

Yeah, absolutely. Do these companies say they own that $100 million warehouse and you buy into it? Do they have exit deposition plans or what? How does that work? Because you're hopping on a train and you're not the conductor of the train. How does that work?

Ben Carmona (12:39)
Yes.

Yes, that's great. I love it. Great question. So absolutely, they do. And that is my job. That's where I get involved in assessing this. I'll just brief step. So I said in the beginning, been in the business for 20 years prior to starting my company, Perch Wealth, advising clients, 1031 exchange clients on what to invest in. I spent 15 years on the

Aviva (12:52)
Interesting.

Ben Carmona (13:09)
the syndication side. So I was with the sponsors, you know, buying the real estate, doing the underwriting, the due diligence, all that sort of stuff. And so I'm intimately familiar with this space. And so that's my job in helping clients. And that's really the value that I add or that we add as a company is there needs to be aside from a good real estate and the fees and the management teams, which are also very important, there needs to be a viable path.

for an exit, right, for appreciation. And so ⁓ I'll just give you a quick example. ⁓ Look, a DST can have one property or multiple properties, but let's say there's a DST out there that has three multifamily projects in there. There's two in Florida and one in Iowa, right? I may love that portfolio. I may love the Iowa asset. I may love the Florida. I may love the whole thing, but

Aviva (13:38)
Hmm.

Ben Carmona (14:04)
I'm looking at exit to your point. Who is going, is there a likely buyer that's going to pay a premium for three assets, two in Florida, one in Iowa? Maybe not, right? They may say, I want the Florida ones, but I don't want that Iowa, right? And that's a very simple example, but that's what I'm looking at. I'm also looking at, know, again, the fees on the front end. Is there a viable path?

You know, how are they going to create value right? Is this an asset that's going to be sold to a publicly traded breed or a private equity group? So that's my job frankly But yes, it's very important

Aviva (14:46)
That makes sense. essentially are the intermediary between a buyer and the trust that they'll, you know, the syndication that they will parlay into.

Ben Carmona (15:00)
And there's a lot of bad actors in my space. I mean, I imagine lots, you know, other industries as well. So you have to be cautious. What I just said made for the listeners sounds amazing, but you have to be working with the right people. I'm not just saying that to toot my own horn, but that's the biggest risk I'd say in my space.

Aviva (15:21)
Hey, any step of the real estate process, a property manager, leasing agent, title, you have to be dealing with capable, ethical people or else, you know,

Ben Carmona (15:34)
And you never know, you

never know, you never know, right? I've to say, I've 20 years of experience to lean on, right? I've had some bad experiences, which I've learned from, right? With folks that I've trusted, but you live and you learn. And I just have to this, because I missed the whole, I didn't even say the biggest part of this whole thing. I talked about turnkey, right? Income.

These opportunities are 100 % passive, right? ideal or prototypical investor, and I touched on this, are the baby boomers, the seniors, right? Those folks that have worked all their life, they've accumulated all this real estate, and they do not wanna take one more single call from a tenant about anything, right? They don't wanna replace the toilet, you know, the three T's.

trash, termites, tenants, toilets, whatever they are, ⁓ they're over it. They are over it. They are hoping and dreaming and praying of a solution that will allow them to sell their real estate, defer paying taxes and redeploy that in other structures that provide stable, predictable income, right? That they can spend more time with their family, do everything else they want to do right now.

Aviva (16:33)
Sure.

Ben Carmona (16:56)
And so I can't believe that. Forgive me, audience. I totally forgot to say that on the front end.

Aviva (17:04)
believe on the street we call that a coupon clipper.

Ben Carmona (17:07)
Yeah, some are coupon clippers, are more opportunistic than others, by and large, yes, the coupon clipper holds true.

Aviva (17:17)
Are you seeing a product type perform better in DSTs right now than others?

Ben Carmona (17:23)
Absolutely, right. Everything's cyclical. Industrial, the world you live in has been hot for quite some time. I think it will continue to be in high demand, which, you know, especially with the administration and their initiatives, like them or hate them, their initiatives, think it's gonna fuel industrial, which is a good thing. And for the baby boomers out there and the seniors,

that are holding on to their asset and built their businesses and they're, you now or could be a great time to sell frankly, you'll get premium. But yeah, I'm not encouraging our clients to invest in retail right now. Now, hopefully, you know, retail has done, you know, it's done okay, but there's still a lot of... ⁓

uncertainty, if you will, with what's going on today. And so our clients have already made their money. They're not necessarily looking for, you know, crazy returns. They're looking for, as you said, coupon clippers. So retail is not typically a food group that we would recommend. Multifamily, you know, we love, right? My whole thing is in the spirit of my clients, they're already rich.

They're trying to get rich, they're trying to stay rich. And so what are those defensive, resilient sectors that are gonna perform in good or bad times, right? Necessity-based sectors, multifamily, healthcare, storage to some extent. I guess an outlier I would say that I love today is mineral rights, oil and gas mineral rights. Love it, love it. Investing in energy.

It's another way to diversify your portfolio.

Aviva (19:05)
Okay, so you can go from selling a warehouse into minerals.

Ben Carmona (19:12)
Yep. Love them. Such a great sector. So widely unknown.

Aviva (19:19)
Ben, I could... I know. I know. No, it's fascinating. It's fascinating. Ben. Yes.

Ben Carmona (19:21)
You got 100 questions, you know. That's good.

Yeah. And

so let me just, I, I'm going to talk about the downsides, right? I didn't even touch on that. I've been talking high. The downsides of a traditional DST, for some it doesn't matter, but nonetheless, so the syndication, if you invest in a DST, you're going to be in there for call it five to seven years, right? There is no secondary market. You can't just sell your position, right? So if you get into a DST,

Aviva (19:55)
Hmm.

Ben Carmona (19:58)
you're gonna be committed. You have to at least expect you're gonna be committed for five to seven years. Could they sell sooner? Yes. Later? ⁓ Yes, but usually it's seven kind of the higher. So that's a big, big thing, right? Somebody has to be willing to give up control and put their full faith and trust in a sponsor company that they may be big, but it's not them. And these folks, our clients have managed a real estate for so long, like,

Aviva (20:10)
Hmm.

Ben Carmona (20:28)
I'm not trusting anybody, right? So I wanted to let your audience know about that. And then, I mean, that's the biggest downside to, I guess, the DST. Now, for our bigger clients, if you're a client that has 3 million, 5 million, 10 million or up, we can customize these deals so that we say, look, we understand, you know, because the client will tell me,

Aviva (20:35)
Hmph.

Ben Carmona (20:57)
You're have to kill me before I give up control to somebody I do not know. Not gonna happen. Period. I understand. But we can work with the sponsors, right, that I've known for 20 years now. used to work with them. And if they like industrial or storage or multi- We will customize a deal for car wash. There's a lot of convenience. We can customize a deal for that client.

Aviva (21:05)
Thank

Ben Carmona (21:23)
And it operates the same way as a DST in the fact that it's completely passive. You're gonna get your monthly income. You're gonna get your quarterly reports. You're gonna get your end of year tax statements. But if you want to refinance or if you want to sell, you can do so. Like it's your property, but we have the infrastructure in place to relieve you of any responsibilities that you don't want.

Aviva (21:38)
Hmm.

If you bought a DST that had a car wash in it, would you capture that bonus depreciation?

Ben Carmona (21:52)
Yes, thank you for asking, I love it. So some of the, yes, so you're right, some of the real estate, in fact we have, well not actually, not Car Wash yet, but convenience, Car Wash, there are sectors as you know that benefit from the bonus depreciation, absolutely. So a DST or the custom deal that I just mentioned, you get all, it's the same exact thing of, all the benefits you get from

Direct ownership you get with the DST or the custom deal. So bonus depreciation is huge, right? Yeah.

Aviva (22:19)
Mm-hmm.

Wow.

So wouldn't it be advantageous to say for a DST to buy 10 warehouses and one car wash just to capture that depreciation?

Ben Carmona (22:35)
So I'm about to open up another 50 questions, which I know you won't have time for. okay, so the DST itself is there are lists like all entities or trusts or REITs or whatever the entity is, there are guidelines or restrictions to safeguarding or protecting the safety of the entity itself. So like for a REIT, you have to distribute 90 % of your income and invest 75 % of

whatever you raise into real estate related projects. If you don't do so, you lose the REIT status, right? Same with the DST, the Delaware Statutory Trust, it offers all these great things, but there are limitations or restrictions. And I'll just name a couple. DSTs, there's no capital calls per se.

Aviva (23:12)
Wow. Yeah.

Ben Carmona (23:26)
Right, so if you Aviva own your own property and there's an issue at the property, you're gonna come out of pocket and you're gonna pay for that. In a DST, you can't ask for more money, right? So the only reason I bring that up back to the car washes, those are more, you know, they're seasonal, cyclical, you know, when it rains season car washes aren't gonna be doing as well, right? Maybe you need to do renovations because of XYZ.

Aviva (23:36)
Hmm.

Ben Carmona (23:53)
So yes, car washes can be in a DST, and they could be in what you described as industrial portfolio with one car wash, they could do that. But I just bring up these examples because there are some limitations that would prevent creating some of the investment.

Aviva (24:13)
fascinating. That is cool. Okay, it's niche cool, like cool for us. I don't know commercially cool, but no, I'm just kidding. It is commercially cool. We're working on it. Ben, what's a commercial real estate secret for the listeners?

Ben Carmona (24:21)
Yeah.

a commercial real estate secret. don't, well, a DST is a secret. ⁓ This world is a secret. If I'm understanding the what do I have, that's a secret. I don't really have anything. I would say hard work. That's it, that's it.

Aviva (24:45)
That's a good one. That

is a secret.

Ben Carmona (24:49)
You know, you work, the luckier you get.

Aviva (24:52)
Amen. Ben, for the listeners, how can they find you follow you learn more about perch wealth, etc.

Ben Carmona (25:01)
Yeah, you can go to our website, www.perchwealth.com. It's not named after a fish. get that sometimes. Perch, what do you name your company after? Fish. And then, honestly, you can call me direct. I will always get back to you, or somebody will get back to you. My cell phone number is 818-269-4972. Yeah, so go to our website, call me direct.

We'll get back to you. We'd love to educate. So if you have questions, thinking about selling your property, right? This is a, for your listeners, and I'm sure you have them, that are, and there's many of them, the DST and other similar 1031 eligible syndications that we offer.

could be the perfect solution for you. You're earning very little money, you have no cost basis left, you don't want to receive another call from a tenant. What do you do? We could be, we could be good fit for you.

Aviva (26:04)
And you can do it across state, like we're in Colorado. I have a lot of owners in Colorado who listen. You could service an owner in Colorado.

Ben Carmona (26:13)
yeah, yeah. I'm in California and there's a lot of population here that's fleeing California. yeah, we have clients in, know, national

Aviva (26:14)
Okay. Okay. Amazing.

Ben, this has been really, really fun and interesting and high value for me and the listeners. Thank you so much for being on the show today. To learn more, yeah, to learn more, go over to perchwealth.com. And for everybody listening, we'll see you next week.

Ben Carmona (26:36)
Absolutely, it's pleasure.