The Developer’s Dream: DST Takeout Financing to Back ADC Financing

The capital markets’ insatiable appetite for Delaware Statutory Trust (DST) investment opportunities continues unabated and becoming a DST sponsor or co-sponsor is now the route that is opening for developers and promoters to obtain cheap, long-term capital.  Broker-dealers and RIAs are now running out of acquisition opportunities and are now considering new construction projects as a source of new opportunities.  This will have a telling impact on the ADC financing vertical for CRE transactions for both commercial real estate equity securities private placement offerings as well as private lending capital providers.  DST sponsor risk and due diligence requirements can be manageable – even in the face of the recent FINRA due diligence compliance requirements placed on the Direct Participation Program financing that broker-dealers support.

Commercial real estate developers are addicted to other people’s money but times have gotten a bit tougher to obtain ADC financing with the commercial banks as a direct result of the Basel III accord’s requirements to treat higher LTV ADC loans as high volatility loans requiring a 50% higher contribution to the bank’s loan loss reserve.  While this is going to have the impact of creating further opportunity for RIAs and other private funding sources, the task of the developer remains the same: the lender won’t get into the deal until they know how they are getting out of it.  The takeout commitment is not getting any easier – or so the conventional wisdom tells us.  The takeout commitment is the condition precedent the ADC lender and investor is looking for to know the water is warm and the time to go swim is now.

Underwriting focus is going to be on risk management as the DST structure is predicated upon the growing 1031-exchange demand that requires a mandatory 10-year holding period.  That 10-year holding period all but guarantees significant exposure to asset obsolescence risk.  1031-exchange properties cannot obtain new financing – what you start with is what you have, so proper underwriting of liquidity risk and its impact on term risk and maturity default risk are important considerations.  Due diligence documentation is not left to chance – the typical due diligence review we have done in the recent past included over 2,000 pages of documentation.  If you are not prepared to provide the requirements, then either get some professional help (hopefully, you consider our firm!) or be prepared to be blocked from the DST route.

Keep your eye on the ball and things could definitely improve for your profit-taking prospects as DSTs offer a true opportunity for multiple levels of near-term profit-taking.

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