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. Recent changes in the tax code have created a new branch of alternative investment opportunities that focus on offering better investment risk protections combined with higher potential capital gains. This makes strong underwriting due diligence reviews a must for every zero-coupon DST offering.
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.
The INVIZEN Platform is designed to engage your business or project at the point in time where you need an accelerator to move the ball forward. The INVIZEN Business Accelerator Program focuses on providing supporting services and programs with the goal of achieving the conditions for that next stage of capital financing and/or profit-taking.
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.