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This is The Anderson Files on PodClips.
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The Anderson Files is a look at commerce, investment, economics, and retirement issues that affect each and every one of you.
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Your host is Mike Anderson, Executive Vice president, retirement services, and partner of Finestone Partners.
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Finestone Partners is an independent firm with securities offered through Four Point Capital.
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And now your host, Mike Anderson. How to create liquidity in real estate.
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Our guest today is Tom Donohue, CEO of True North Real Estate Wealth Management.
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True North is a private real estate investment firm that focuses on capitalizing on opportunities in a cyclical and dynamic environment.
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Tom.
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Good morning.
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Welcome.
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Good morning.
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How are you? Excellent.
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Thank you for being with us, and to get right into it, you know, regarding the subject of liquidity and real estate, which can be tricky.
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It’s an art and a science.
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What are the alternative paths to effectuate a 10 31 exchange in this area? Yeah, I think in today’s environment, especially in these high tax rate states, say California and New York,
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you know, a lot of people are hanging on to real estate. They don’t want to sell their real estate because they’re afraid of the outcome as far as their tax flow outcome.
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Then, on the other side, is they also don’t necessarily want to sell the real estate and do a 10 31 exchange, whereby they have to go out and try to find something, especially in these low cap type environments.
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And so, you know, one of the alternatives that we’ve been using is the Delaware Statutory Trust, also known as the DST, which oftentimes, or not oftentimes, but it acts very similar to a limited liability company whereby you can have multiple investors invested into, you know, a single purpose asset.
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There’s really two different types, you know, we look at two different types of real estate.
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You have a multi-tenanted property, a lot of people like that because it’s risk averse,
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because, you know, one tenant is not gonna cause typically a financial collapse in the asset, or alternatively, you can actually go into a single purpose asset with a large credit tenant.
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And so what happens with statutory trust? It’s more appropriate for a Delaware Statutory Trust to own very large institutional quality assets.
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Say it’s an Amazon distribution building or Verizon Wireless Headquarters, any asset that typically has 15 to 20 year lease term remaining.
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And so if you are, if you currently hold an asset, let’s say it’s a million dollars of value and you want to sell that property.
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You can now, instead of having to go out 45 days and go try to find additional property, you can actually create or effectuate your exchange into one of these long term credit tenant properties.
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So we like it because, for a whole host of reasons, one is because the property, you can immediately do your exchange.
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You don’t need to wait 45 days or 180 days to close, and we can do that within 24 hours.
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And why we, we suggest that there’s a liquidity event, is because oftentimes in some of these large single tenant assets, there’s a refinance that takes place whereby you can pull out, you know, offers of 85 to 88% of your cash from the transaction, which is, which is a tax deferral feeback.
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So, that’s the Delaware Statutory Trust structure and, and why we’re big proponents of it right now. What size deals do these typically involve? Is there a threshold where this type of deal makes sense? For the investor or for the trustees? The ones that are buying the buildings or for the investor and then for the trustees? Yeah, I think from a from the investor standpoint, typically it’s, you know, somebody that’s owned a piece of real estate where they, where they pretty much have fully depreciated their property, obviously, therefore, they’re facing a high, you know, high tax scenario.
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But really, the DST we think makes sense for anybody that’s doing an exchange, say from $500,000 on up.
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Now, when I say on up, it could be, you know, we’re recently doing a transaction with a family right now, that’s a $400 million exchange.
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And so one of the main reasons why now, from the trustee standpoint, why we look to seek to buy these very large institutional quality assets, is because we’re able to go out to get bond financing on these properties, fully non-recourse because these companies are actually underwriting the tenant more so than they are the real estate.
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We like having 15 to 20 year leases on these properties because what it does is it avoids a couple of things.
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One, it avoids the risk of having to refinance at some point during the life of the whole.
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And you know, the other thing it avoids is some type of market, you’re gonna have multiple tenants and like we experienced in 2008 and all of a sudden, you know, we we, you lose the asset.
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So what we try to do is we like buying these big, big large institution assets.
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And, and the reason why, typically is because of their size, let’s say it’s $100 million asset or a $200 million asset, we can then bifurcate ownership position for these investors.
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And so we can go down, I mean, we can have 400 to 500 investors in one particular transaction.
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That’s not a problem.
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Right? And for the time that we’re in here, we’re three months plus into the pandemic.
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It’s affected earnings growth, appetite for risk, capital investing in general.
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How, are you finding the, the market right now? Well, the market, you know, because of the or maybe not because of the pandemic, but certainly has, it’s had a significant impact is, you know, the question we all ask in this industry is, OK, what do you invest in? You know, is our office building the right, you know, market to invest in? Retail, I mean, we all know that would be a challenging market to invest in too.
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So we’re able to fortunately kind of avoid these types of market conditions and that’s why we go out, we will acquire these very large institutional assets.
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So like in Amazon distribution building is an example, you know, people are looking at that saying, well, you know, what’s the risk profile with an Amazon? You know, and we think the risk is fairly low.
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We think because of what we’re experiencing this pandemic, you know, online, you know, sales are gonna continue.
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We’re looking at data centers right now, that kind of took a little bit of a slowdown six months ago.
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Now, they’re, they’re picking back up significantly with the development of all these new data centers for the FANG companies, right, via Facebook, Apple, Netflix and Google.
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They’re, all those companies are very much needing to increase their data because online sales are happening so rapidly.
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So we like those market segments. As far as liabilities and holding interest in a Delaware Statutory Trust.
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Could you describe that? Yeah.
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So, because we’re getting the bond financing and because the tenant is credit rated and they’re obviously they’re very strong.
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The lenders typically, the only thing the lenders look to is the tenant.
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They’re not looking for any kind of personal guarantees from the trustee or even from any of the underlying individual investors.
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You know, one of the things we did experience in 2008 in the CMBS market is even though the loans that were entered into were considered fully non-recourse, you know, that’s still not a guarantee.
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Oftentimes lenders would go back to their loan document and say, well, you know, there was a breach of this covenant, therefore, that triggers quote the bad boy carve outs.
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Therefore, this loan has now become recourse and, and we saw a lot of that. In this situation with these types of assets, there’s none of that, these are fully non- recourse assets.
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So that the investors do not have liability. As far as industries that this type of structure current in today’s environment would be more applicable to the IT
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industry, finance, manufacturing, are there particular industries that you’re focusing in on right now? You know, I wouldn’t say there’s any real particular industry.
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It’s more what the rating of who the tenant is, the higher the rating, the better for us, how strong they are financially.
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Yeah, we do look at, I mean, obviously we’re gonna look at history and you know, if it’s a Verizon headquarters like that we have. As an example we own, you know, VA the VA hospital headquarters, you, those are the types of buildings we like, it’s, I mean, the VA the Veterans Administration hospital clinics, we love, we like them for a couple of reasons.
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One is because typically there are 15 to 20 year leases, and they’re, all the money for that rent period for the rent that’s paid out over a 20 year period has been fully appropriated by the Senate.
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And so, you know, to me, I really don’t know of another real estate asset class industry that’s safer than owning a VA hospital, fully appropriated by the by the Senate.
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So, you know, the money has already been approved? Right. As far as the benefits of utilizing a DST, could you describe those? Yeah, I think, you know, one of the benefit is,
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and one of the main benefits is it’s a guarantee.
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I mean, we, you know, the property that you’re investing in the properties are already owned by the trustee. As an example, we’ll just use the Verizon Wireless.
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So, you don’t have to go out and, you know, spend that 45 days and search and look for a property.
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So that’s number one.
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Number two is you’re you’re able to get into your own, a piece of a very large institution asset at a very, you know, at a very low entry point, let’s call it, say $500 or a million dollars.
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You know, most people don’t have access to that.
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Now, some people will say, well, this is very reminiscent of the tenant in common era we experienced in the nineties and, and yeah, it’s very similar in structure to the tenant in common or the tech industry.
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However, it’s also very uniquely different and where it’s different is in the fact that, you know, these are long term leases.
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Whereas back in the nineties, you know, these tech companies were formed to buy multi-tenant properties and, and typically the sponsor who put these together, they generated their fees up front and then they just disappeared, which is why you saw the class in the tech industry.
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So that’s another benefit to these these are, you know, the trustee is in place.
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Another reason is, or another potential benefit for a lot or for some people is, you know, there’s not a K 1 issue, you know, these are operating statements that are issued at the end of each year.
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So they don’t need to wait, you know, for a K 1.
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This is The Anderson Files with your host, Mike Anderson, our guest today, Tom Donohue. Up next will be Jeff Barton with Malibu Funding, talking about mortgages. Tom to return to the subject.
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How does an accredited investor get involved with this type of opportunity? How would they approach your firm and to inquire about the opportunity? Yeah, I mean, they can, they can contact me directly.
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They, I mean, how well, first and foremost is we, we’re happy to educate anybody as it relates to what a Delaware Statutory Trust is.
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We have a team of advisors.
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We work with the largest accounting firms in the country, the largest law firms in the country.
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And so we have a lot of resources for people to, if they have questions that they can tap into,
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they can reach out to me and I’m happy to refer them to whomever they may need to speak to.
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So, and if you do you want me to give him my contact details, will you be distributing that? You’re more than welcome to share the best way to contact you please.
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My email would be Tom at True North, which is truenorth and the letters R as in red, E as in Ellen, W in wealth, M as in management dot com. (tom@truenorthrewm.com)
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So tom@truenorthrewm.com.
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My phone number, if people want to call me directly is fine.
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It’s 480-766-2518.
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Tom with that, what product types are the best fit for the DST structure? Product type is, is we like, we very much like warehouse, industrial warehouse.
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Right now, that’s really kind of where our focus has been, on that as well as on some of these data centers.
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But I would say primarily it’s industrial warehouse, which is why we’re doing a lot of business with the likes of an Amazon, Facebook and as well as Google.
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So we, we definitely like that product.
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We typically stay or staying away from corporate headquarters at house that are more office oriented and like as referencing earlier, we very much are wanting to acquire additional VA hospitals. For office space where there’s some indication that during this period of COVID-19, people working from home, more people working from home, having the ability to work from home,
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do you see the office space sector, from your investment perspective, improving, or kind of treading water, or not really being that attractive?
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Yeah, it’s a really valid question and the jury is still out to see what impact COVID-19 is going to have on multiple product sectors.
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You know, we take a position currently, you know, I can’t, I believe it was Twitter that, I think it was Twitter, the organization Twitter that announced ,that they were gonna now allow, you know, a large percentage of their employee population to work from home.
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And I think what corporations or companies like this are realizing is, obviously, you know, the, the price that, you know, the price for office rents, let’s say in downtown San Francisco, might be $85 a square foot.
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And they’re recognizing, wow, we can, you know, we don’t need to pay that anymore.
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And so I think, you know, we’re a little, we’re very gun shy on office space.
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The question now is gonna become, well, how is that office space? Let’s just, let’s just make the assumption that it does take a very, it does, it takes a hit economically, you know, will these office buildings whether it be in urban markets or in suburban markets, will they be repurposed into something else? You know, the jury is obviously out on that.
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So, so we typically don’t, we’re not fans of the office sector at this, at this point in the game. For opportunities from state to state and regions within different states,
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how would you compare, let’s say, Southern California to the Phoenix area, to the Bay Area to portions of Texas?
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Is there some defined benefits or value from focusing on different geographic areas? You know, this is, it’s a fascinating question.
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Fascinating because of what COVID-19 has really caused. You know, I’m, in the Scottsdale Arizona market where our offices are, and where I liv,e and what we’re seeing just, you know, not me from a real perspective.
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But you’re seeing a large movement of people out of Southern California and the Bay area here.
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We’re also seeing a lot of people in the Bay Area and Ssouthern California moving to areas, you know, that are not so densely populated, with the likes of Montana.
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they’re, you’re seeing tremendous growth in Montana, you’re seeing tremendous growth in the first name, in Boise Idaho and, and where I used to live, which is in Bend, Oregon.
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So a lot of people are now looking at life differently, which is part of the benefit of the COVID.
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And they’re saying, you know, can I have a quality life? It’s different.
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Do I really need to be in an office? Can I work, you know, remotely and if I’m going to work remotely, then I’m going to work in an area that I can recreate and enjoy?
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And so I think you’re starting to see some movement out of those major metropolitan or major urban core markets, say New York, you know, California and places like that.
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Now you start also starting to see a large resurgence in the Midwest and a lot of it is because of the affordability.
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As an example, you know, the Bay Area, you know, maybe the average price per square foot of Palo Alto in the South Peninsula is say $1500 a square foot, whereby the average price per square, foot here in Scottsdale is $250 a square foot for a house.
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And so, you know, families are looking at that and and COVID, you know, COVID scared all of us, you know, where, where is the money gonna come from? And so I think people are definitely kind of, you know, hunkering down a little bit more and not spending so freely and kind of weighing what other options are there and what markets.
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So I think, I think some of these secondary, tertiary type markets, that they are always tertiary markets are now going to become kind of the the new, you know, becoming in vogue is going to be where people are going to want to be.
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Are are there sections of the Southeast that look attractive? You mentioned parts of the west, parts of the Midwest,
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does the Southeast come up on your radar? It it comes up on the radar, you know, obviously, primarily Florida because of because of the state income tax.
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I think that’s obviously a major driver there.
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But we’re also seeing quite a bit of growth in the Carolinas, South and North.
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And once again, I think it’s a lot of it has to do with the affordability factor.
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And now, now you have a state tax planning that’s taking place and people are looking at what state are advantageous for further state tax planning. From a tax standpoint, has the structure of corporate taxes from state to state been a factor, awaiting factor for you or not really?
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And at the corporate tax rate level, has that been a significant factor in your decision making? As far as where we choose to acquire our properties?
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Right.
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Yeah.
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Now, you know, for us, it really does, it, once again, it’s a good question. When you look at Plano, Texas, which is, I think what holds the most fortune 500 companies, you know, densely or concentrated in one area than anywhere in the country.
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We don’t, that, to us is not necessarily important for us.
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It’s really, you know, it’s who the tenant is and, and what is their creditworthiness and their financial strength? I mean, it’s kind of fun for us is, you know, most lenders are when they, when they’re loaning on real estate, they’re looking at the underlying asset, they’re looking at the real estate, like, oh my gosh, if we have to take this property back, you know, what are we gonna own, you know, in our situation because it’s really bond financing.
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And so, you know, the moneys are really just and these lenders are looking at the underlying tenant.
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And so that makes us feel a lot more comfortable in that.
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So we’re not really concerned about, you know, where these companies are headquartered.
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If the lease structure is sound, then we’ll go anywhere.
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Tom, any final thoughts?
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No, I final thought is I just, you know, I hope everybody obviously, you know, stays safe and healthy and and all that stuff and you know, from a real estate perspective, if we can help and provide any kind of advice, like I said, feel free to reach out, call me, not a problem.
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And you know, I’m basically at home. Tom, thanks so much for guesting today, Tom Donohue CEO of True North Real Estate Wealth Management.
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Thanks so much.
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We hope to have you back in the future.
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I’d love to, thank you guys.
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You guys are doing a great, great thing.
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So it’s nice, nice to talk to you.
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Thanks so much.
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And for today, Darrell Wayne at the controls, wanna thank Darrell, Mark Alyn, producer.
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Thank you, Mark, I’m Mike Anderson, your host.
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You’re listening to The Anderson Files, keep calm and keep listening.
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You’ve been listening to The Anderson Files with Mike Anderson.
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Visit us at PodClips.io and check on the Financial box for more information on The Anderson Files.