Are DSTs the New Construction Take-Out Financing Source for CRE Developers?

Since launching our flagship real-time underwriting program in June we have seen a real surge in DST offerings of beneficiary interests to 1031-exchange investors by sell-side broker-dealers who are responding to the seemingly endless demand for commercial real estate investment opportunities by the investing-public.  One of the things that surprised us most was the switch from older, established properties to new construction properties that a developer has just finished and placed in operation.  Some of these DST transactions are 100% equity – no debt, no bankruptcy risk.  1031-exchange rules are clear – no new construction deals.  You have to exchange for like-kind assets.  There is nothing in the rules however that state you can’t be part of a DST that has acquired a property once construction is complete and the property has been placed in operation.  This reality now creates an incredible new opportunity for commercial real estate developers seeking capital financing who would otherwise have been shut out of the market for other reasons.

The reality of commercial real estate development financing is that every investor (or lender) makes an investment only when the market evidence suggests to them the property will either be refinanced or sold-off at maturity with the result being the investor or lender realizing the economic benefits they are seeking.  Without this condition precedent being satisfied, the answer for the financing proposal is a rejection.  This means the take-out commitment must be there to get the construction loan commitment so that you can get the equity to the table because everyone wants to know how they are getting out before they get in.  This created a convenient monopoly for commercial lenders until Dodd-Frank came along and the commercial banks largely exited the market.  Their exit created a market disruption and that lead to more innovation with the advent of the DST market growth being one of the outcomes.

For commercial real estate developers, this means the opportunity to co-sponsor the development with a DST sponsor now provides the opportunity to provide the takeout financing source the construction lender needs to come to the table.  This has the potential to reduce cost, risk and time in ways that will forever change the way commercial real estate development transactions are financed.  If you are a commercial real estate developer facing those long odds of failure to obtain capital (and more than 4 out of 5 do fail to get capital) then your opportunity calculations just changed.

The times, they are ‘a-changin’…


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