One of the emerging trends in commercial real estate development financing is the use of DST structures to secure development financing. The Delaware Statutory Trust (DST) entity organization is commonly used as a 1031 exchange investment vehicle for investors seeking to shield capital gains from taxation.
There exists a robust market for investment in properties held in DSTs and this can be leveraged by the developer to obtain construction phase financing.Like all lenders, the construction lender wants to know how they are going to get out of the investment before they make a commitment to get into it and a DST sponsor who has a proven distribution network for the capitalization of DST property acquisitions can provide the cold comfort the construction lender is looking for and the source of near-term profit-taking the developer is looking for. This can be underwritten to create a win-win scenario for all of the parties at-interest.
Pre-Negotiating the DST Acquisition Price
The developer needs the DST purchase as the take-out, so the developer typically agrees to a slight discounting of the value in order to utilize the take-out to secure the financing from the construction lender. This also goes a long way towards sustaining the argument for a proposed non-recourse construction financing for the commercial income-producing property at interest.Developer experience – most DSTs are capitalized by the broker-dealer and registered investment adviser marketplace, so the standards for developer qualification are quite high, leaving most developers out of contention. Having said, joint-venture proposals with experienced DST sponsors go a long way towards resolving the issue (and INVIZEN can help refer you to DST sponsors who would entertain such proposals).
Most commercial income-producing property asset classes are considered to be acceptable, though some less than others for DSTs. The most difficult asset classes to underwrite are retail and hospitality due to the problems inherent in each. Accordingly, the underwriting review is of critical importance and the requirement for careful investment/asset monitoring for the full term of the investment cannot be overstated (again, talk to INVIZEN about having this done on an affordable, proactive, real-time basis).
The timing is the entire focus. The DST take-out has to be conditionally negotiated before the construction mortgage loan financing proposal is sent to the construction lender, as this will give it the credibility boost it may need for acceptance. Without the DST conditional approval in hand, the construction mortgage financing application process is no better off than it was without any consideration being given to the DST structure at all.
The INVIZEN Platform was conceptually designed to support the end-goal of preventing investment losses from being realized on commercial real estate loans and investments.
The INVIZEN Platform design construct offers an end-to-end approach that engages the project or business at whatever life-cycle stage the given project or business may be currently found to be operating within. The INVIZEN Platform is designed to provide a progressive sweep of the entire due diligence spectrum of issues with every review. It starts with the valuation of the transaction opportunity.
Collateral underwriting is important but the reality is that collateral underwriting really only comes into play for EAD calculations and insurance risk mitigation. The value of the opportunity is the real issue and the Verifier Report from INVIZEN directly addresses this issue in terms of determining if the proposed transaction is priced at a discount to market based upon the specific risk profile presented by the project, the project’s business and the project’s market. That’s the Verifier Report.
Market Risk Management
First Look is our real-time market feasibility analysis reporting system for which there is no peer. The next-gen analytics design of First Look provides testing of the empirical assumptions and findings of the market feasibility analysis to determine if a reasonable basis exists for their inclusion and/or use in the resulting report that includes detail you just can’t find anywhere else. That’s the First Look Report.
Financial Risk Assessment Underwriting
Final Check is the crown jewel of the INVIZEN Platform. Final Check provides full capacity risk underwriting, collateral risk underwriting, credit risk underwriting and default risk underwriting financial risk assessment data and findings that is backed by a post-funding monitoring program that prevents the most common causes of credit and default risk events from becoming your loss severity risk realities. That’s Final Check and there is just nothing like it.
The outflow is then matched into our unique credit risk management platform that ties credit risk (again, think hard about managing CECL) and default risk prevention program known as iCREDIT.
This unique system provides real-time forensic auditing of every transaction event and generates an entirely new set of GAAP financial statements for the benefit of all financial partners that can be accessed in real-time.
Financial reporting transparency risk, execution risk, default risk and all of the associated risks are now within the scope of being proactively managed. That’s the INVIZEN approach that makes the difference in everything we do.
We provide opportunities in the form of distressed asset acquisition opportunities for sponsors and developers that meet the specific underwriting standards and requirements of the specific funds and institutions we support.
Our compliance services focus on FINRA (we are a FINRA Compliance Vendor) and supporting broker-dealers, banks (FASB Topic 326 compliance opportunities regarding CECL), credit unions, community banks, advisors, family offices and institutions that are seeking something more than reactive data and mitigation as being the only likely outcome.
INVIZEN is about reaching your peak opportunity efficiency level and having the freedom to focus on transactions that are profitable; transactions that have the likelihood of actually closing.
Clear up your backlog of time-sensitive opportunities.
Reduce your loss reserve calculations.
Turn CECL into a competitive advantage.
Exceed expectations of regulators when it comes to compliance with FINRA, SEC, OCC or the several states.
When you engage with Rainmaker Analytics you are engaging with a team and a system that is designed to make the financial instruments your firm engages in become a matter that is manageable, less frustrating and more profitable.
Your new path forward starts with that first phone call and confidential consultation.