Capital markets demand for zero-coupon DST commercial real estate private placement offerings has rebounded from the COVID pandemic market paralysis due to the potential tax advantages that attend the Delaware Statutory Trust investment structure and pipeline shortages in the CRE vertical. Having said, not all zero-coupon opportunities are the same. Careful attention to the long-term market risk exposure and potential for tax recapture requires strong due diligence when it comes to investment screening. Changing tax code provisions, the changes to Regulation CF offerings, the changes to Regulation A offerings and Rule 506(c) have created an entirely new class of investment vehicles that offer potentially superior risk controls and capital gain opportunities that may in fact displace DST investing as a market preference.
Special Bulletin on Capital Financing
The SEC has released Final Rule 33-10884 that includes landmark changes to Regulation A, Section 4(a)(6) – “Regulation Crowdfunding” or “Reg. CF” – and Regulation D private placement securities offerings, together with new rules and guidance on securities offerings for small and medium size issuers and commercial real estate developers. This new final rule creates fundamental changes in how our capital markets will function in the future and how entrepreneurs, businesses and CRE developers can access capital financing for their business ventures. We are in the process of updating the website to reflect these incredible changes (and their associated new opportunities) and urge you to review the new rules and regulations with your legal counsel before undertaking further capital financing activities as you have in the past. Please feel free to contact us to discuss your proposed capital financing needs. In the meantime, we suggest you read some of the relevant information already posted on our website (start here).
Zero-coupon investment transactions create huge term default risk and maturity default risk issues for the investor in a 1031 exchange transaction because the zero-coupon structure dictates there will be no dividends paid over the term.
The zero-coupon structure focuses on the investor realizing their gains when the property is sold at the end of the investment term. In the case of DST and other 1031 exchange vehicles that term is 10 long years.
Options & Alternatives
The changes in the tax code, combined with the changes in how private placement offerings can be presented to the capital markets as a result of the passage of the JOBS Act, have created a whole new window of investment opportunities for accredited and unaccredited investors in the CRE vertical. The risks typically associated with these investments now include investment screening and investment loss risk prevention tools and reporting systems designed to proactively address execution risk, fraud risk, financial reporting transparency risk, and even market risk. Rainmaker Analytics provides alternative capital structures and supporting financial risk underwriting assessments for creating these powerful opportunities that have the potential for short-term IRR boosts combined with tax-advantaged investing that doesn’t require the mandatory 10-year holding period risk.
In the typical zero-coupon transaction structure, the investor is buying the security at a significant discount to its market value and when the security matures the difference between that market value and the discount price is the profit the investor realizes.
This is great on near-term obligations where the holding period is short, but on longer term transactions where there is no mandatory call (meaning the securities are equity securities and not something like bonds) the potential for investment loss severity risk can be quite high. This requires special considerations be applied to the underwriting and due diligence assessment process to provide investment loss severity risk management on an ongoing basis and an investment loss mitigation structure to manage the inevitable loss potential that would likely be realized in these long-term holding periods.
INVIZEN supports the project and the participants the entire way with our exclusive suite of business planning services specifically designed to proactively manage execution risk because the budgets, goals and owner requirements are automatically updated and transmitted down to the line employee level through every level of management that includes tasking, productivity measurement and automated reporting. What does your due diligence program have?
INVIZEN offers the only end-to-end solution specifically-designed to help end loan and investment losses in CRE securities private placement offerings by addressing the totality of the underwriting and due diligence issues in a real-time, proactive environment that only gets started with pre-closing due diligence. The INVIZEN Stop Loss program is designed to help prevent the key risks from becoming future asset impairment problems while also proactively managing and/or deterring investment fraud, management performance and foreclosure default event exposure.
INVIZEN was purposely built to provide underwriting and due diligence reviews with one singular goal in mind: preventing future loss on capital investment made today.
To understand the INVIZEN value proposition is to understand the basic processes that attend the underwriting goal of using independent information to determine the value of an income-producing business asset. INVIZEN automates these processes so the cost of underwriting drops dramatically and the speed of processing increases dramatically as well. The underwriting happens in real-time and that means we can give CRE NNN property investors the luxury of future investment performance assurance by re-underwriting the transaction each and every month of the investment holding period to give you up to 24 months of advance notice of changes in the market, the asset or operations that may have an impact on the future income-generating capacity of the market, property and site. These notices can be both good and bad. INVIZEN has artificial intelligence at its core and computers don’t care if you have trash, it will still be another man’s treasure.