Presented by: Michael R. Frager, ChFC, CLU, EA Michael T. Sisson, CPA, PFS. FSA Integrated, LLC

Transcription

1 Securities and Advisory Services offered through Centaurus Financial, Inc. a registered broker/dealer and a member FINRA and SIPC. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in CA, AZ, NV, NC. Presented by: Michael R. Frager, ChFC, CLU, EA Michael T. Sisson, CPA, PFS FSA Integrated, LLC

2 General Disclosure The Information Provided in this Material and/or Seminar: Is for Educational Purposes Only and Is Not Intended as a Solicitation to Buy and/or Sell Securities. Is Not Based On Any Specific Individual Investment Offering. Is Not Intended to Replace the Advice of An Investors Current Advisor. Please Consult With Them About the Merits of Any Ideas Discussed in This Presentation. Uses Return Rates in the Examples Only for Illustrative Purposes and Is Not Guaranteed. Past Performance Is Not a Guarantee of Future Performance or Results. Is Not Intended to Give Specific Tax, Investment, Estate or Financial Advice, But Rather Serves as an Educational Platform to Deliver Information. Is Not Intended to Show How the Strategies Presented Can Specifically Apply to a Specific Individual s Own Tax, Investment, Estate or Financial Position, But Rather is an Idea of How These Principles Generally May Apply. Is Only Applicable to Accredited Investors Individuals with a Minimum Net Worth Of $1m (Excluding The Value Of A Person s Primary Residence) Or Who Have Had $200,000 Of Annual Income As A Single Person Or $300,000 As A Married Couple, For The Last 2 Years. 2

3 Specific Disclosure for DST Delaware Statutory Trust 1) Investors Should Not Invest in DSTs if they Cannot Afford to Lose Their Entire Investment. 2) Due to the Lack of Liquidity in Every DST Investment, DSTs are Long Term Investments. 3) The Current Economic Downturn and Disruption in Financial Markets has had a Negative Affect on Real Estate Net Income and Values, Including Both TIC and DST Investments. There Is No Information Available as to When or If, the Real Estate Market Will Become Less Volatile, Net Income Will Improve and/or Property Values Will Stabilize. Disclosure and Notice of Advisor Policy Regarding Public Inquiries: This Report is Intended to Provide Investors with an Educational Presentation of the Potential Benefits and Risks Associated with an Investment in a Delaware Statutory Trust Real Estate Investment. However, It Is Not Intended as an Offering, Sale or Solicitation of Any Particular DST Investment. Federal Securities Law Prohibits Issuers of Securities And Their Agents from Soliciting Investors for Any Particular DST Offering Unless They Have Reasonable Knowledge That Such Investors Are Accredited Investors, as Further Defined Under Section 501 of Regulation D of the 1933 Securities Act and Later Defined by the 2010 Dodd-frank Act. 3

4 The Purpose of This Presentation To Address, Discuss and Formulate Possible Solutions to the Following Problems Many Real Estate Investors Are Facing 4

5 Potential Problems Real Estate Investors Face Net Income After Expenses Could Be Low Compared to Property Value Difficulty in Locating a Quality 1031 Replacement Property in 45 Days Income Taxes Can Potentially Take Up To 15%, 25% or More of Sale Proceeds Dealing with Tenants Higher Quality Real Estate and Tenants are Desired Lack of Property Diversification Lack of Tenant Diversification Opportunities for Real Estate Appreciation Might Be Limited Real Estate Owner Might Be Personally Liable for Debt on His/Her Property Current Rental True Net Cash Flow Might Not Be Consistent Current Rental Cash Flow Might Be Heavily Taxed Possible Heavy Burden of Day-to-Day Management Decisions for the Property 5

6 Potential Problems True Net Cash Flow Defined True Net Cash Flow As Defined Herein Is What A Real Estate Owner Has Left In His/Her Pocket After All Expenses and Cash Outflows Are Accounted For. It is Purported That Many Real Estate Investors Do Not Fully Understand True Net Cash Flow. True Net Cash Flow from Real Estate Is: - $ Gross Rent Income Received - $ Less All Tax Deductible Operating Expenses - $ Less Additional Cash Outflows* - $ Less Repairs - $ Less Amortized Cost of Capital Improvements Over the Projected Holding Period**. = True Net Cash Flow*** * This Can Include Mortgage Paydown and Unaccounted Out-of-pocket Costs. ** These Costs Will Need To Be Paid, But Are Usually Not Planned For. *** ThisTrue Net Cash Flow Calculation Does Not Take Into Consideration the Value of the Time, Work and Effort a Real Estate Owner Invests In His/Her Property. 6

7 What is a Standard 1031 Tax-Deferred Exchange? A Standard 1031 Tax-Deferred Exchange, Also Called a 1031 Tax-Deferred Exchange, A Tax-Deferred Exchange, or Simply a 1031, Is Governed By Internal Revenue Code Section A 1031 Potentially Allows a Seller of Real Estate to Defer Up To 100% of the Gain and Therefore the Income Taxes, He/She Has On the Sale of Property Which Is Held For Investment. Internal Revenue Code Section 1031(a)(1) States: "No Gain or Loss Shall Be Recognized On the Exchange of Property Held for Productive Use in a Trade or Business or for Investment, if Such Property is Exchanged Solely for Property of Like-Kind Which Is To Be Held Either for Productive Use in a Trade or Business or for Investment. The Very Basic Description of a Standard 1031 Exchange Is That An Individual Can Sell Property #1 and if He/She Follows a Myriad of IRS Rules and Restrictions They Can Buy Property #2 and Defer Up To 100% of the Income Taxes on the Sale of Property #1. The Investor Has to Decide to Implement a 1031 Exchange Before Property #1 Closes Escrow and Has 45 Days to Name Property #2 as Their Replacement Property and 180 Days to Close Escrow on Property #2. To Receive a Full Deferral of Income Taxes, Property #2 Must Receive at Least 100% of the Net Equity Proceeds Which Came Out of Property #1 and Property #2 Must Cost At Least as Much as Property #1. 7

8 Development of IRC Section 1031 Exchange in the U.S. Tax Code 1921 Tax-Deferred Exchanges Allowed 1954 IRC Section 1031 Established 1986 Capital Gain Tax Benefits Eliminated 2004 Revenue Ruling on DSTs 1928 Tax-Deferred Guidance Provided 1984 Tax-Deferred Partnerships Interests Disallowed 2000 Reverse Exchanges Guidance 1918 U.S. Tax Code Created 1935 Qualified Intermediary Use Created 1984 Adoption of Delayed Tax-Deferred Exchanges 2002 Revenue Procedure on TICs 1924 Non-Like-Kind Exchanges Disallowed 1979 Starker Deferred Exchange 1991 Final Treasury Regulations on 45/180 Day Time Periods Source: Asset Preservation Inc. API 3/2009 8

9 1031 Details To Know A 1031 Account Must Be Established with a Qualified Intermediary Before the Close of Escrow on the Property (Property #1) Being Sold. An Investor Cannot Close Escrow on a Property #1 Today and then Decide Tomorrow to Implement a 1031 Tax-Deferred Exchange. From the Date Property #1 Closes Escrow, there is a Maximum of 45 Calendar Days to Name the Next Property (Property #2) the Investor Plans to Buy. From the Date Property #1 Closes Escrow, there is a Maximum of 180 Calendar Days to Close Escrow on Property #2 Which Was Named in the Initial 45-day Period. In Some Cases, Sellers May Not Receive the Full Benefit of the Entire 180 Days if the Due Date for their Tax Return in the Year Following the Sale Occurs Prior to the End of the 180 Day Period. In that Case, the Taxpayer Would Need to File an Extension in Order to Have the Benefit of the Full 180 Days. The Sales Proceeds for Property #1 Must Go from the Title/Escrow Company Directly to the Qualified Intermediary ( QI ). The Investor Must Not Receive Any Funds from the Sale of Property #1 or from the Title/Escrow Company. Funds Received by the Investor are Considered Boot and are Generally Subject to Income Taxes. Property #2 Must Cost at Least 100% of what Property #1 Sold For. To Benefit from 100% Income Tax Deferral, Investors Cannot Trade Down from Property #1 into Property #2. The IRS Allows Full Tax Deferral Only If the Replacement Property (#2) has Equal or Greater Value as Property #1. Property #2 Must Have at Least as Much Debt as Property #1 Unless the Investor Pays Down the New Debt with Extra Cash. 9

10 1031 Details Investors Need to Know Investors May Use Any of these Three (3) Methods to Specify Replacement Property: 1) Name up to Three Replacement Properties of Any Individual or Combined Value. This is Called the Three Property Rule. One or More of the Three Named Properties Can Then Be Purchased as Qualifying Replacement Property. 2) Name as Many Properties as Desired as Long as the Total Value of All Properties Does Not Exceed 200% of the Sales Price of Property #1. This is Called the 200% Rule. 3) Name as Many Properties as Desired Regardless of Total Value (Even Exceeding the 200% Rule Described Above) as Long as the Investor Ultimately Buys as their Replacement Property at Least 95% of the Total Value of all Properties Named Under This Method. This is Called the 95% Rule. 10

11 1031 Details Investors Need to Know 1031 Tax-Deferred Exchange Timeline 45 Days Is Often The Problem 180 Days Generally Not The Problem 45 Calendar Days 180 Calendar Days Date That Original Property Is Sold Must Name Replacement Property with QI Must Purchase Replacement Property 11

12 Potential Problems With A Standard 1031 Exchange Own Current Property Replacement Property Sales Proceeds Sales Proceeds 1031 Qualified Intermediary Sell Current Property Buy New Property Current Property Potential Issues Low Net-Rent Income Large Amount of Equity Tenants Lack of Diversification Market Risk Repairs and Vacancy Low Basis New Property Potential Issues Low Net-Rent Income Large Amount of Equity Tenants Lack of Diversification Market Risk Repairs and Vacancy Low Basis Carryover 12

13 Many Real Estate Investors are Searching for Opportunities to: Provide an Alternative to a Standard 1031 Tax-Deferred Exchange Potentially Increase Net Rental Cash Flow Eliminate Their Involvement in Daily Property Management Defer Income Taxes When They Sell Properties One Potential Option To Consider DST Delaware Statutory Trust 1031 Tax-Deferred Exchange 13

14 What is a 1031 DST Delaware Statutory Trust? DST Delaware Statutory Trust Individual Beneficial Trust Interest DST Buys Real Estate Institutional -Grade Real Estate Beneficial Interest of Trust Percentage Owned by Individual Investor DST Trust Ownership Interests are Available for Ownership for Up To 499 Investors 14

15 What is a 1031 DST Delaware Statutory Trust? Sales Proceeds 1031 Qualified Intermediary Sales Proceeds Sell Current Property DST Delaware Statutory Trust Individual Beneficial Trust Interest DST Buys Real Estate Investor Buys Beneficial Interest of Trust Percentage 15

16 What is a 1031 DST Delaware Statutory Trust? DST Real Estate Investment Provides a Beneficial Ownership Interest in a Trust That Owns Real Estate DST Beneficial Interest Not Individual Ownership DST Delaware Statutory Trust Individual Beneficial Trust Interest Revenue Ruling DST Buys Real Estate IRS Treats a Properly Structured DST Real Estate Investment as True Real Estate Ownership 16

17 1031 DST Delaware Statutory Trust Flowchart Proceeds Invested, 1031 or Cash Potential For Income & Growth Ownership Evidenced by Purchase Agreement & Executed Trust Document DST Delaware Statutory Trust Individual Beneficial Trust Interest DST Delaware Statutory Trust Trustee/Sponsor Principal, Interest, Secured by a 1st Trust Deed Trustee Leases Real Estate to Master Tenant DST Buys Real Estate Trustee Buys Real Estate DST Property Proceeds Lent to Trust, No Recourse to DST Investors Real Estate Owned By Trust, Provides Potential Income & Growth Master Tenant Pays Cash Flow Master Tenant (Sponsor/Affiliate) Space Tenant Pays Lease Income to Master Tenant Space Tenant Master Tenant Leases Real Estate to Space Tenant 17

18 1031 DST Delaware Statutory Trust Flowchart Proceeds Invested, 1031 or Cash Potential For Income & Growth Ownership Evidenced by Purchase Agreement & Executed Trust Document DST Delaware Statutory Trust Individual Beneficial Trust Interest DST Delaware Statutory Trust Trustee/Sponsor Principal, Interest, Secured by a 1st Trust Deed Trustee Leases Real Estate to Master Tenant DST Buys Real Estate Trustee Buys Real Estate DST Property Proceeds Lent to Trust, No Recourse to DST Investors Real Estate Owned By Trust, Provides Potential Income & Growth Master Tenant Pays Cash Flow Master Tenant (Sponsor/Affiliate) Space Tenant Pays Lease Income to Master Tenant Space Tenant Master Tenant Leases Real Estate to Space Tenant 18

19 What is a 1031 DST Delaware Statutory Trust? A DST is Created Under Delaware Law and is Considered a Separate Legal Entity. DSTs Created Under Delaware Law Can Provide Financial Planning Flexibility. A Properly Structured DST Must Comply with IRS Revenue Ruling to Qualify as a Viable 1031 Replacement Property Alternative. DST Real Estate Investment is the Ownership of a Beneficial Interest in a Trust Which Owns Real Estate. The Beneficial Interest is Considered a Direct Real Estate Investment by IRS and is Taxed Accordingly. Each DST Owner Owns a Beneficial Interest of the Trust Which Results in a Percentage Ownership of Real Estate Recognized by IRS. Each Owner Receives a Proportionate Share of Net Income, Tax Deductions and Appreciation. DST Ownership Interests May Be Unequal in Percentages Between the Individual Investors. 19

20 What is a 1031 DST Delaware Statutory Trust? Each DST Investor May Sell or Will the Share of the Trust He/She Owns. Title to the Property is Held by the Trust Itself, Rather Than by its Beneficiaries, an Individual, LLC, Corporation or Partnership. The Trust has Title Insurance for All Properties Purchased in the Trust. DST Ownership Programs Can Involve up to 499 Unrelated DST Investors. A DST Owner has Some of the Same Economic Benefit Opportunities as a Single Owner of Property Potential Income and Potential Growth. A DST Owner has Some of the Same Economic Disadvantages as a Single Owner of Property Potential Loss of Income and Potential Loss of Capital. A DST Owner s Share in the Trust and Economic Benefits and Risks, is Equal To the Percentage of their Trust Beneficial Ownership in the Trust. According to Arnold S. Harrison, a Nationally Recognized Expert in Delaware Statutory Trusts (DSTS) and a Partner in the Chicago Office of Jenner & Block, to be Recognized by the IRS as a Properly Structured DST, a DST Must Avoid the Seven Deadly Sins : 20

21 Seven Deadly Sins 1031 DST Delaware Statutory Trust 1. Once the Offering is Closed, there can be No Future Contributions to the DST by Either Current or New Investors. 2. The Trustee Cannot Renegotiate the Terms of the Existing Loans Nor Can It Initiate Any New Secured Loans from Any Party. Two Exceptions are if the Current Loan is in Default or in Imminent Danger of Being in Default or if the Tenant is Insolvent or Bankrupt. 3. The Trustee Cannot Reinvest the Proceeds from the Sale of its Real Estate. 4. The Trustee is Limited to Making Capital Expenditures with Respect to the Property to those for: a) Normal Repair and Maintenance b) Minor Non-structural Capital Improvements and c) Those Required by Law. 5. Any Cash Held Between Distribution Dates Can Only Be Invested in Shortterm Debt Obligations. 6. All Cash, Other Than Necessary Reserves, Must Be Distributed. 7. The Trustee Cannot Enter into New Leases or Renegotiate Current Leases. Two Exceptions are if the Current Loan is in Default or in Imminent Danger of Being in Default or if the Tenant is Insolvent Or Bankrupt. 21

22 Mandatory DST Technical Issues Mr. Harrison Goes On to State that a DST Must Be: 1) A Special Purpose Entity. 2) Bankruptcy-Remote. 3) A Very Passive Holder of Real Estate (The Trustees Will Have Minimum Powers and the Beneficiaries Will Have No Powers with Respect to the Mortgaged Property). Thus, the Use of a DST Will Generally Be Limited To Long- Term A Credit Triple-Net Leased Properties (a Box-In- One ) or Properties Leased To An Affiliate of the Sponsor Who Will Operate the Property on a Triple-Net Basis (a Master Lease ). 22

23 Typical Types Of DST Properties Single-Tenant Retail Apartment Industrial Warehouse Land 23

24 Typical DST Investment Cycle Typical Holding Period Typical Time Period DST Property is Sold Date that DST Property is Purchased 4 Years 10 Years Holding period could be longer than illustrated based many factors including prevailing real estate market conditions, financing, tenants, building condition, etc. 24

25 DST Real Estate Investments Not Just for 1031s Some Professionals and Investors May Believe that DST Real Estate Investments are Limited to 1031 Tax-Deferred Transactions. This is Not the Case DSTS are Available to Non Investors for Cash Investment Also and Can Provide These Potential Benefits: Tax Cost Basis Equals Cash Investment Plus Debt Daily Management Handled by Sponsor/Affiliate Potential for Quality Real Estate & Tenants Potential for Tax Advantaged Cash Flow Potential for Competitive Returns from Net Rental Income 1031 Tax-Deferred Opportunity of Future Gains Experienced Property Management Team Non-Recourse Debt Possible Opportunity for Conservative Debt-to-Equity Percentages 25

26 HYPOTHETICAL DST Case Study #1 Disclosure This following hypothetical case study is presented to show the potential economic opportunities and risks of DST investments. It is not based upon any particular DST investment and actual results will vary. There are loads, fees and expenses associated with every DST investment which must be considered before any investment is made in a DST. For a detailed discussion of the investment risks and fees associated with DST investments, please see the DST Risks, Fees, Rules and Restrictions section of this presentation. Investors should not invest in DST s if they cannot afford to lose their entire investment. There are no guarantees that any specific DST offering will provide income as promised. Due to the lack of liquidity in every DST investment, DSTs are long term investments. There are no guarantees that any specific DST offering will not lose money. There are significant RISKS and FEES associated with investing in any DST offering. For a detailed discussion of the investment risks associated with DST real estate investments please see the section of this presentation titled DST Risks, Fees, Rules and Restrictions. The current economic downturn and disruption in financial markets has had a negative affect on real estate net income and values, including both TIC and DST investments. There is no information available as to when or if, the real estate market will become less volatile, net income will improve and/or property values will stabilize. DO NOT RELY ON THE FOLLOWING HYPOTHETICAL CASE STUDY TO MAKE ANY DST INVESTMENT DECISIONS. PLEASE CONSULT WITH YOUR PROFESSIONAL ADVISOR PRIOR TO INVESTING. Hypothetical Illustration and Actual Results Will Vary. 26

27 HYPOTHETICAL DST Case Study #1 Basic Data Stan and Julie Own a Residential Rental Worth $500,000 Property Purchased 20 Years Ago for $75,000 Depreciation Claimed of $50,000 $1,000 Per Month, $12,000 Per Year Net Income They Don t Want to Manage Real Estate Any Longer They Would Like to Increase Their Income Hypothetical Illustration and Actual Results Will Vary. 27

28 HYPOTHETICAL DST Case Study #1 Current Cash Flow The Following Data Provides the Information and Calculation for the Current Net Cash Flow from the Hypothetical Residential Rental Property. The Residential Rental Provides $1,875 of Monthly Gross Rental Income ($22,500 Annual) and Provides $12,000 of Annual Net Income After All Expenses. Annual gross rent received $ 22,500 - Real estate taxes ($ 3,000) - Insurance ($ 1,200) - Utilities ($ 900) - Landscape maintenance ($ 1,800) - Repairs ($ 1,500) - Pool ($ 900) - Miscellaneous expenses ($ 1,200) = Current Annual Net Cash Flow $ 12,000 The Current Annual Net Cash Flow is Net of Projected Operating Expenses Listed Above. The Income Projected Above Could Be Higher or Lower and The Expenses Projected Above Could Be Higher or Lower. Some of the Additional Costs That Were Not Projected in this Hypothetical Analysis, but Could Be Assessed at Any Time and Therefore Should Be Considered, Include But Are Not Limited to Exit Costs, Operating Expenses Not Budgeted For (Such as Higher Than Anticipated Repairs Like a New Roof, Increased Insurance Rates, Higher Leasing Commissions, etc), Tax/Legal/Financial Planning Fees for Professional Advice and All Other Costs Not Planned for in this Analysis. Hypothetical Illustration and Actual Results Will Vary. 28

29 HYPOTHETICAL DST Case Study #1 Income Taxes Due Sales Price $ 500,000 Less Net Cost Basis ($ 25,000 ) Equals Net Taxable Gain $ 475,000 Federal Income Taxes Due on Sale Assumes 15% Federal Capital Gain Tax Rate Assumes 25% Federal Unrecaptured 1250 Gain Tax Rate State Income Taxes Due on Sale Assumes 10.3% Maximum California State Capital Gain Tax Rate Highest US State Tax Providing Worst Case State Tax Scenario $ 76,250 $ 48,925 Equals Total Income Taxes Due on Sale Assumes No State Income Tax Deduction $ 125,175 Offset to Federal Income Taxes Hypothetical Illustration and Actual Results Will Vary. 29

30 HYPOTHETICAL DST Case Study #1 Cash Flow Analysis Income Taxes Due on Fully Taxed Sale $ 125,175 Income Taxes Due on DST 1031 Sale $ 0 Equity Transferred to DST $ 500,000 Equals Total Income Taxes Due on Sale $ 125,175 Assumed Annual DST 6.75% * $ 33,750 Assumed Current Annual True Net Cash Flow $ 12,000 *The 6.75% Rate Used in this Example is the Average Annual First Year Cash Returns of 1031alternative Investments Available Through DST and TIC Real Estate Ownership Offerings Available as of January 1, 2009, According to OMNI Brokerage on January 1, The 6.75% Rate Is Not Guaranteed Unless it is Under a Master Lease Arrangement. Even Then, Such a Guarantee Would Be Subject to the Financial Stability And Creditworthiness of the Master Tenant. the 6.75% Rate Could Be Lower or Higher, Currently or in the Future. The 6.75% Rate is Net of Projected Operating Expenses (Including Expenses Listed in the PPM Such as Mortgage Payments, Real Estate Taxes, Insurance And Repairs), Net of Projected Property Management Expenses, Net of Projected Leasing Commissions and Net of Projected Working Capital Reserves. OMNI Brokerage Reports that the Average Load with Reserves is 16.07% and the Average Annual Property Management Fee is 4.4%. Additional Costs That Were Not Deducted and Should Be Considered Before Investing, Include But Are Not Limited to Exit Costs, Operating Expenses Not Budgeted For (Such as Higher Than Anticipated Repairs, Increased Insurance Rates, Higher Leasing Commissions, etc), Tax/Legal/Financial Planning Fees for Professional Advice and All Other Costs Not Budgeted for in the PPM. OMNI Brokerage Reports that the Average Exit Fee is 3.74%. The Hypothetical Illustration Above is for Educational Purposes Only and Is Not Indicative of Any Particular DST Investment. Actual Results May Vary From the Illustration Shown Above. DSTs are Subject to Risks and Fees. For an Explanation of these Risks and Fees Please See the DST Risks, Fees, Rules and Restrictions Section of this Presentation. Hypothetical Illustration and Actual Results Will Vary. 30

31 HYPOTHETICAL DST Case Study #1 Exit Options When the Real Estate Inside the DST is Sold, Funds Must Be Distributed to the DST Investors. DST Investors Have These Potential Exit Strategies at This Point: 1) Take the Cash Distribution as a Taxable Transaction and Pay Income Taxes that are Due. 2) Implement a 1031 Tax-Deferred Exchange: a. New DST Investment b. New TIC Investment c. Standard 1031 Individually Owned Property 3) Up-REIT Option This Option Terminates the Option of Future 1031 Tax- Deferred Exchanges But Can Provide Tax-Deferral by Selling REIT Shares Over Time. While the Up-REIT Can Be A Viable Exit Strategy Out Of A DST, There Are Many Risks of an Up-REIT Including But Not Limited To: No Guarantee of Income, No Protection of Principal, Complex Structure, Lack of Liquidity, Real Estate Market Risks, Failed Due Diligence, General Economic Risks, Tax Risks, Financing Risks, Poor Management, Costs and Fees, Lease Risks, Liability and Lawsuits. Hypothetical Illustration and Actual Results Will Vary. 31

32 HYPOTHETICAL DST Case Study #1 Future Taxable Sale If an Individual Decides to Receive their DST Liquidation Transaction as a Taxable Transaction, 100% of the Gain Would Most Likely be Subjected to Both Federal and State Income Taxes. While it is Impossible to Know What Federal and State Income Tax Rates Will Be In Force at a Future Date When a DST Property is Sold, This Presentation Can Provide Some Guidelines Based on a Range of Federal and State Combined Income Tax Rates. This Exercise is Designed to Prepare Investors and Advisors for Any Potential Income Tax Obligations Which May Be Due Upon Liquidation. Economic Assumptions In This Analysis: There is an Initial $25,000 Income Tax Cost Basis in the DST Investment. Property Value Does Not Increase For During 7 Year Analysis. Depreciation Claimed at 2.56% Per Year on $25,000 Original Cost Basis. DST Property Sold in 7 Years. Combined Federal and State Income Tax Rates on the DST Sale Will Be Calculated At 30%, 40%, 50% and 60%. Factors That Could Increase Income Tax Rates to These Levels Include but are Not Limited to Congress Increasing Federal Tax Rates and Individual States Increasing State Tax Rates. Individual Tax Rates Will Vary. The Income Tax Calculation in the Hypothetical Sale of the Residential Rental was at a Combined Federal and State Income Tax Rate of 26.35%. Hypothetical Illustration and Actual Results Will Vary. 32

33 HYPOTHETICAL DST Case Study #2 Basic Data Vince and Kim, Age 50, Own a Commercial Property Worth $4,000,000 - $3,500,000 Equity + $500,000 Loan Have Owned Real Estate for Over 25 Years and Would Love to Get Out of the Landlord Business Purchased Building 10 Years Ago for $2,000,000 Depreciation Claimed of $350,000 Current Net Income After All Expenses is $95,000 Would Like to Increase Net Income To At Least $170,000 So Kim Can Retire Fix-ups will be Required Over Next 5 Years Hypothetical Illustration and Actual Results Will Vary. 33

34 HYPOTHETICAL DST Case Study #2 Current Cash Flow The Following Data Provides the Calculation for the Current Net Cash Flow from the Hypothetical Commercial Investment Property. The Property Provides $28,500 of Monthly Gross Rental Income ($330,000 Annual) and Provides $95,000 of Annual Net Income After All Expenses. Annual gross rent received $ 330,000 -Mortgage payments ($ 43,000) -Real estate taxes ($ 19,700) - Insurance ($ 6,400) - Utilities ($ 22,500) - Landscape maintenance ($ 14,400) - Current repairs ($ 17,500) - Amortized future repairs ($ 30,000) - Property management ($ 15,000) - Leasing commissions ($ 13,100) - Tenant improvements ($ 35,400) - Miscellaneous expenses ($ 18,000) = Current Annual Net Cash Flow $ 95,000 The Current Annual Net Cash Flow is net of projected operating expenses listed above. The income projected above could be higher or lower and the expenses projected above could be higher or lower. Some of the additional costs that were not projected in this hypothetical analysis, but could be assessed at any time and therefore should be considered, include but are not limited to exit costs, operating expenses not budgeted for (such as higher than anticipated repairs like a new roof, increased insurance rates, higher leasing commissions, etc), tax/legal/financial planning fees for professional advice and all other costs not planned for in this analysis. Hypothetical Illustration and Actual Results Will Vary. 34

35 HYPOTHETICAL DST Case Study #2 Income Taxes Due Sales Price $ 4,000,000 Less Net Cost Basis ($ 1,650,000 ) Equals Net Taxable Gain $ 2,350,000 Federal Income Taxes Due on Sale Assumes 15% Federal Capital Gain Tax Rate Assumes 25% Federal Unrecaptured 1250 Gain Tax Rate State Income Taxes Due on Sale Assumes 10.3% Maximum California State Capital Gain Tax Rate Highest US State Tax Providing Worst Case State Tax Scenario Equals Total Income Taxes Due on Sale Assumes No State Income Tax Deduction Offset to Federal Income Taxes $ 387,500 $ 242,050 $ 629,550 Hypothetical Illustration and Actual Results Will Vary. 35

36 HYPOTHETICAL DST Case Study #2 Cash Flow Analysis Income Taxes Due on Fully Taxed Sale $ 629,550 Income Taxes Due on DST 1031 Sale $ 0 Equity Transferred to DST $ 3,500,000 Assumed Annual DST 6.75% * $ 236,250 Assumed Current Annual True Net Cash Flow $ 95,000 *The 6.75% rate used in this example is the average annual first year cash returns of 1031Alternative Investments available through DST and TIC real estate ownership offerings available as of January 1, 2009, according to OMNI Brokerage on January 1, The 6.75% rate is not guaranteed unless it is under a Master Lease arrangement. Even then, such a guarantee would be subject to the financial stability and creditworthiness of the master tenant. The 6.75% rate could be lower or higher, currently or in the future. The 6.75% rate is net of projected operating expenses (including expenses listed in the PPM such as mortgage payments, real estate taxes, insurance and repairs), net of projected property management expenses, net of projected leasing commissions and net of projected working capital reserves. OMNI Brokerage reports that the average Load with reserves is 16.07% and the average annual property management fee is 4.4%. Additional costs that were not deducted and should be considered before investing, include but are not limited to exit costs, operating expenses not budgeted for (such as higher than anticipated repairs, increased insurance rates, higher leasing commissions, etc), tax/legal/financial planning fees for professional advice and all other costs not budgeted for in the PPM. OMNI Brokerage reports that the average Exit Fee is 3.74%. The hypothetical illustration above is for educational purposes only and is not indicative of any particular DST investment. Actual results may vary from the illustration shown above. DSTs are subject to Risks and Fees. For an explanation of these risks and fees please see the DST Risks, Fees, Rules and Restrictions section of this presentation. Hypothetical Illustration and Actual Results Will Vary. 36

37 HYPOTHETICAL DST Case Study #2 Exit Options When The Real Estate Inside the DST is Sold, Funds Must Be Distributed to the DST Investors. DST Investors Have These Potential Exit Strategies At This Point: 1) Take the Cash Distribution as a Taxable Transaction and Pay Income Taxes Which Are Due. 2) Implement a 1031 Tax-Deferred Exchange: a. New DST Investment b. New TIC Investment c. Standard 1031 Individually Owned Property 3) Up-REIT Option This Option Terminates the Option of Future 1031 Tax- Deferred Exchanges But Can Provide Tax-Deferral by Selling REIT Shares Over Time. While the Up-REIT can be a Viable Exit Strategy Out of a DST, There are Many Risks of an Up-REIT Including But Not Limited To: No Guarantee of Income, No Protection of Principal, Complex Structure, Lack of Liquidity, Real Estate Market Risks, Failed Due Diligence, General Economic Risks, Tax Risks, Financing Risks, Poor Management, Costs & Fees, Lease Risks, Liability and Lawsuits. Hypothetical Illustration and Actual Results Will Vary. 37

38 DST Ownership Features For 1031 Tax-Deferred Exchange Purposes and for Income Tax Purposes, DST Ownership is Real Estate Ownership Without The Management. Owning Real Estate Involves Potential Opportunities for Rental Cash Flow, Appreciation, Income Tax Benefits and Possibly Wealth Leverage. Owning Real Estate Also Carries Corresponding Investment Risks that Relate to Market Conditions, Tenant Turnover, Failure of Tenants to Pay Rent, Competing Real Estate Projects and Management Competence or Lack of Experience, Failure in the Due Diligence Process, etc. The Investor and the Investor s Legal and Tax Advisors Should Review All Pertinent Aspects of the DST Property Being Acquired as well as the Offering Sponsor. Some of the Areas that Should Be Reviewed Are Shown On The Following Slides. 38

39 Evaluating DST Opportunities Evaluate the Real Estate Provider (Sponsor) Analyze DST Program Evaluate 1031 Tax Compliance Analyze Replacement Property Investment Fundamentals Including: What is the Projected Income Flow? Is the Projected Income Flow Reasonable and Realistic? What is the Condition of the DST Property? Will the DST Be Operated By A Master Lease or a Management Agreement? What are the Fees Being Charged? Is the DST Property Located in an Area Acceptable to the Investor? Who Are the Proposed Tenants of the Property? How Long Are the Leases? What Types of Rent Escalators Are In Place? How Much Reserves Are Set Aside? What is the Experience and Track Record of the Property Manager? What Are the Aspects of This Investment? (Property Type, Vacancy Rate, Tenant Mix, Market Conditions, etc.) 39

40 Why Consider DST Delaware Statutory Trusts A DST Delaware Statutory Trust Real Estate Ownership Interest has a Number of Possible Advantages: Viable Source of 1031 Replacement Property Some Sponsors Have Low Minimum Investments Quality Institutional-Grade Commercial Property The Potential for Competitive Cash Flow Elimination of Daily Management Timing to Fit Specific Needs of Each Client Quality Tenants Tax Efficiency with Sale and Cash Flow Turnkey Financing 40

41 Why Consider DST Delaware Statutory Trusts DST Real Estate Ownership has a Number of Possible Advantages: Diversification and Risk Reduction Flexibility for 1031 Exchanges Variable Investment to Match Investor Needs Money at Work Appreciation Opportunities Stepped-up Basis at Death Notwithstanding These Features, There Are Also a Number of Related Investment Risks that Must Be Considered Prior To Investing. These Investment Risks Are Set Forth in the DST Rules and Restrictions Section of this Presentation. 41

42 DST Risks, Fees, Rules and Restrictions Projected Appreciation May Not Occur as Planned: Lower Gross and Net Lease Income Issues With Tenants and Leases Property Condition and Maintenance Weak Real Estate Market The IRS Could Change the Laws Regarding 1031s and DST Investments Estate Taxes The Ability to Resell DST Interests is Limited DST Property Might Sell Out Before DST Ownership is Finalized A DST Sponsor Could Go Out of Business Requires New Management Another Significant Consideration is the Management of the Property Potential that the DST Property May Not Close as Planned If a Lump Sum of Cash is Needed, the DST Investor Might Have to Sell His/Her DST Investment, Subjecting Himself/Herself to Immediate Taxation, Including Taxation On All Previously Deferred Gain 42

43 DST Risks, Fees, Rules and Restrictions DST Investment Fees and Costs When an Investor Purchases Real Estate, Whether Individually or as a DST, there are Many Costs and Fees Associated with Acquiring, Managing and Selling the Property. For DST Real Estate Investments, Upfront Costs and Fees are Referred to as a Load, Annual Ongoing Expenses are Called Management Fees and Expenses Associated with the Ultimate Sale of the DST Property are called Exit Costs. These Items are Explained in Tremendous Detail in the Private Placement Memorandum for Each Specific DST Property. Bryan S. Mick, MBA, JD, is the President of Mick & Associates, P.C., LLO in Omaha, Nebraska, a Provider of Independent Due Diligence Services for Various Broker-Dealers Throughout the Country. Mr. Mick is Considered One of the Most Experienced Attorneys in Providing Due Diligence Research and Reports on TICs/DSTs. Mr. Mick has been Called on Many Occasions to Act as an Expert Witness On the Subject of Private Placement Investment Due Diligence. Mr. Mick s Firm Has Reviewed Over 600 TIC/DST Offerings. Mr. Mick s Firm Has Reviewed Over 400 Other Private Placement Offerings. Mick & Associates Has Provided the Statistical Data for DST/TIC Fees and Costs. 43

44 DST Risks, Fees, Rules and Restrictions Load Selling Expenses: Organization and Offering Expenses. Commissions and Placement Fees: Managing Broker Dealer, Broker Dealers, Registered Reps Marketing Expenses Due Diligence Allowance Real Estate Expenses: Acquisition Fee to Sponsor Financing Fees & Costs Third-Party Broker Fee Closing Costs 44

45 Due Diligence - Disclosure DST Due Diligence Process No Guarantee of Success Due Diligence is Required to Provide Potential Investors with the Proper Amount and Types of Information to Help Evaluate a Delaware Statutory Trust Offering Before Any Investment is Made. While the Number One Goal of the Due Diligence Process is to Provide Help to a Potential Investor to Make an Informed Decision, There Is No Guarantee that the Due Diligence Process Will Succeed In This Goal. Even Though Due Diligence is Performed on a Specific DST Offering, the Specific DST Offering Is Not Guaranteed to Succeed. 45

46 Due Diligence Third-Party Review and Due Diligence To Defer Income Taxes, Many Investors Buy a Replacement Property Based on a Minimal Amount of Information. In Many Cases, a Decision on a Multi-Million Dollar Property Must Be Made Before Even a Small Amount of Due Diligence Can Be Performed. Little Is Known About the Building, the Tenants, the Lease(s), Actual Property Condition, Past Building or Tenant Issues, Net Cash Flow Opportunities and the Potential for Long Term Success, Which Requires Thorough and Proper Due Diligence. DST Investments Require Comprehensive Due Diligence All DST Properties Offered Should Have Undergone Comprehensive Due Diligence Before They Are Presented to Clients. No One Should Invest in Any Type of Property Without Thoughtful, Unbiased and Comprehensive Due Diligence. In Fact, FINRA Requires Broker-Dealers to Perform Careful Due Diligence on DST Sponsors Prior to Offering Them to Clients (NASD Notice To Members 05-18). Due Diligence Does Not Guarantee Successful Investment Results, Nor Does Due Diligence Guarantee that the Due Diligence Process and/or Opinions are Correct. It is Hoped that Due Diligence Can Potentially Help Investors to Identify Investment/Operational Risks/Issues, that Should Be Addressed Before an Investment is Made and Can Affect Investment Performance. 46

47 Due Diligence - Disclosure Due Diligence is a Very Important Aspect of the DST Investment Process. But Even at its Very Best, Due Diligence Cannot Guarantee Success of a Specific DST Offering Nor That the Due Diligence Will Have Any Beneficial Impact At All. Due Diligence Cannot and WILL NOT: Guarantee Cash Flow Won t Decrease or Terminate. Guarantee Appreciation. Guarantee the Property Won t Lose Money. Guarantee the Due Diligence Process Was Handled Correctly. Guarantee Anything About Future Happenings Regarding the Property. Guarantee the Property Lease Income Won t Decrease. Guarantee the Property Expenses Won t Increase. Guarantee Anything About the Property Currently or in the Future. Due Diligence Does Not Guarantee Successful Investment Results, Nor Does Due Diligence Guarantee that the Due Diligence Process and/or Opinions are Correct. It is Hoped that Due Diligence Can Potentially Help Invertors to Identify Investment/Operational Risks/Issues, That Should be Addressed Before an Investment is Made and Can Affect Investment Performance. 47

48 Questions?