Delaware Statutory Trust (DST) investments routinely include zero-coupon DST securities private placement offerings on commercial real estate (CRE) property businesses that have significant maturity default risk exposure. In a zero-coupon DST offering, the subscriber (who becomes a beneficiary of the Trust) expects to realize all of their economic gain 10 years from the date of close of escrow and not anywhere else along the way. This is a huge risk position as the market where the property operates (or properties operate, in the case of portfolio transactions) is bound to suffer a variety of potential market disruptions that could impact the future value of that investment being made today. The investment loss vs. reward calculation for a zero-coupon commercial property DST would be based upon the answers to the following:
- What are the odds cap rates will be low enough for the investment scheme to work (the term, “scheme”, not being used pejoratively)?
- In light of recent CRE losses on loans and investments, what are the odds there will be multiple market disruptions that could impair the future value of that investment?
- What can be done to minimize the risk exposure?
All CRE acquisitions suffer under the cap rate issue. You know what you have to pay (the “going in cap rate”) by dividing the first-year Net Cash Flow by the total offering (equity+debt) amount. To get to the required exit cap rate ceiling, add the promised yield to the working capital and subtract the debt balance, and then divide the forecast exit year Net Cash Flow by that sum. If you think cap rates will be higher than that, then you should probably think about another investment vehicle.
Market disruptions are baked into the cake – that’s part of the risk premium you are supposed to be paid. Advances in technology can mean more competitors or more competitors and another way of doing the same thing that costs less, provides more benefits or renders the current way obsolete entirely. E-commerce rendered many bricks-and-sticks retail businesses obsolete just as the car rendered the buggy whip manufacturers obsolete. Your choices are: (i) ride it out and take your lumps – not a very attractive alternative; or (ii) do something about it.
Doing something about the exposure to market disruptions means you have to proactively monitor the investment and have the luxury of having the CRE investment go through another underwriting review cycle each month of the asset holding period to maximize the opportunity for investment performance assurance.
Luckily, INVIZEN can help you with this seemingly impossible task by providing the first end-to-end solution that proactively monitors CRE investments – including DST investments – in real-time to help prevent future investment non-performance by providing up to 24 months of advance notice of market disruption events and other events that could potentially impact the future value of the assets.
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?
Currently, the asset classes supported by the INVIZEN RTS program include the following commercial real estate specific intended-use scenarios:
- Multifamily Rental Class “A”
- Multifamily Rental Class “B”
- Multifamily Rental Class “C”
- Multifamily Age-Restricted Rental Senior Housing
- Multifamily Rental Independent Living Facility Senior Housing
- Multifamily Rental Assisted Living Facility Senior Housing
- Multifamily Rental Alzheimer’s Assisted Living Facility Senior Housing
- Multifamily Rental Congregate Care Senior Housing
- Multifamily Continuing Care Retirement Community (CCRC) Senior Housing
- Commercial In-Line Retail
- Commercial Single-Tenant (Retail/Commercial/Healthcare Sub-Scenarios)
- Commercial Enclosed Retail
- Commercial Mixed-Use Retail
- Commercial Office Class “A”
- Commercial Office Class “B”
- Commercial Office Class “C”
- Commercial Light Industrial Flexspace
- Commercial Distribution Facility
- Commercial Mini-Storage
- Hospitality – Resort Class
- Hospitality – Full Service Class
- Hospitality – Limited Service Class
- Hospitality – Value Class
Find out more by talking to an INVIZEN representative today at 832.663.9634.