Hi All,
I've transacted and consulted a few major PE shops that structure their acquisition process on a Cash on Cash basis because they don't care/need high exit caps due to their business model.
Summary of what they do: They come in...acquire an asset very low leveraged, get an amazing rate from an agency because of the LTV. Once the PSA is signed they then distribute their newly owned asset to their DST investors (Primarily composed of 1031 exchange folks I believe). So overall their exposure is only a couple of months.
With all that said, do you guys have experience within the realm? I talked to their fund manager and they are very interested in bringing me on board as an Acquisition Analyst I maybe II. Is there anything I should know more about it before I take the next steps in the process?
This is an incredibly lucrative niche if you find one of the few groups that does it right. Cantor, Inland, and Cottonwood are the biggest players here. Just keep in mind this is a tax loop hole investment strategy. In the same way that TIC's dried up during the last recession, this stream of capital could easily dry up as well. This is a fee driven business model so there is more risk here as you need constantly do deals to justify your existence.
I looked at a deal for a DST syndicator a ways back. A primary concern of ours was 'what happens to 1031 exchanges in a recession?' Thinking they'd dry up because deal flow dried up etc. Well the IRS has data you can review showing the actual # of 1031 exchanges claimed in each tax year going back 20 something years or whenever Sec. 1031 was written. The surprising thing was 1031 exchanges actually increased during the 2008 recession. It was a noticeable YoY increase for multiple years if I recall.
... only problem is that 1031's aren't limited to real estate. One can claim 1031 exemption for commercial vehicles, land, improved property, even livestock, and the IRS data didn't categorize the types and quantity of 1031's were occurring.
that said I will echo what picklemonkey said - it will all depend on the group you are with. This is absolutely a fee driven production model and very very complicated legal structures. 1031's / DST's are fantastic income tax loopholes, but the deals you acquire still have to underwrite to make sense and those are getting harder and harder to find. I personally would lean towards a group that is very, very, very experienced in this space and run away from any group that was new to market. Should your clients feel like they were duped into a bad deal your pipeline could dry up pretty quick just from bad press.
$0.02
Thanks for the responses, I believe this is a pretty unique scenario where it's a massive privately backed acquisition process that could easily disregard the DST transition and hold long term. With that said, my job would most likely include trying to find equity partners in the deals so our original investors could remain somewhat liquid. Question #2, if I help run this sort of fund FKA "Tax Loophole" would I then be looked down upon at say a Landmark or Bain to become a senior associate for risk and or acquisitions?
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