Sophisticated investors, accredited investors and 1031-exchange investors are big participants in the alternative investment marketplace, with both constant-coupon and zero-coupon DST structures and other alternative investment structures providing the vehicle for opportunities for long-term holdings, tax-advantaged investing opportunities and their attending risks.
Zero-Coupon DSTs, Constant Coupon DSTs & Their Alternatives
Zero-Coupon DSTs offer the lowest tier of investment returns potential and are presented as being essentially riskless investments. Zero-Coupon DST transactions are typically front-end loaded in favor of the trust depositor who also acts – thru affiliate entities owned/controlled by the trust depositor – as the broker-dealer of record, the trust manager, the asset manager, the property manager and the prime tenant (called the “master tenant”).
While the investor is forced to be in the deal for the entire 10-year term to obtain their gain, the sponsor side cashes in the second the deal closes. You may wish to ask the question, if this mandatory 10-year holding period is so good, why is the sponsor cashing out now?
Constant Coupon DST Structures
The DST structure can also be structured as a DST that pays a constant dividend (hence, the “constant coupon” nickname) that is paid typically on a monthly, quarterly or annual basis. Some of the same issues that are discussed above also apply here. The exception here is that, at the very least, you are supposed to receive periodic dividends on your investment instead of waiting 10 years to see if it works out or not.
Alternatives to DST in Tax-Equivalent Investments
The November 2020 change in the securities regulations, combined with the tax code revisions, creates the opportunity to participate in investment vehicles that offer essentially similar benefits to the Delaware Statutory Trust, but sidestepping the key issues of potential uncompensated risk exposure, lower yields, and high sponsor costs associated with the DST approach.
Bonus Depreciation, Capital Gain Deferment & Profit-Taking Enhancements
By combining super allocations of bonus depreciation expense with near-term profit-taking events and capital gain deferment opportunities, the overall IRR of the investment vehicle stands to offer a huge boost in earnings compared to the DST construct, assuming everything works out per the sponsor’s plan.
The new constructs are typically structured to provide a tax-equivalent yield in the low teens for the 10-year period with optional exit points and roll-over opportunities that are for you to decide (instead of being mandated that you bear).
No matter what you decide to invest in, it pays to have independent due diligence, the advice of counsel, and consultations with your tax and business advisors before you make a move and jump into the fray. If you have questions regarding these topics please feel free to contact an INVIZEN consultant today.