Coronavirus, Real Estate Lending Problems, and how a DST could help

Wally Smith:

If I’m going to sell a property to somebody, that person has to be able to buy my property. Are they going to be able to get a loan to buy my property?

Rich Arnitz:
That’s some of the things that people are coming to Ridgegate with right now where they can’t close on the individual property themselves. There is a clause with a lot of lenders because as you can imagine, the capital markets are up in turmoil right now and a lot of people don’t want to keep these assets on the books. They want to go ahead and turn around and sell them into the market. And you can’t do that with the capital markets right now. So a lot of lenders have a clause in their loan docs called a MAC–materially adverse conditions–and a lot of lenders are pulling their loan offers to buyers.

I’m buying commercial real estate currently right now on the individuals because the rates change so quickly. And so there are a lot of individuals that are doing a direct ownership of real estate date that are having problems getting their transaction closed in that timely fashion so that they can defer their taxes.

And that is one of the challenges that individual owners are facing currently right now. And that’s one of the benefits that you could go away with in the sense where DSTs already have the loan in place, locked in, have that insurance of close so that individuals that are trying to look into doing a 1031 Exchange don’t have that as a problem or an issue.

Wally Smith:
…We are fielding a lot of calls, some panicked calls, some are folks wondering whether they should step aside and wait for everything to sort itself out. A lot of that I think really ties in with whether they’re going to be able to get their transaction. Now, before we took the break, we were talking about exactly that. For real estate transactions to be executed successfully, there’s usually a debt component in that. There’s usually a bank, a lender somewhere providing some of the money.

Now, not always. There’s some all cash deals. Somebody will sell and it’s buying it with cash and they receiving the cash. But in, I think most transactions there is an element of debt. So what we were talking about before was MAC–M-A-C–materially adverse conditions and the effect that that can have. That’s a clause that lenders will put in a lending agreement that basically says, hey, if everything hits the fan, there are materially adverse conditions that are happening with regards to this loan or the environment or overall-

With regards to this loan or the environment or overall, certainly coronavirus is a materially adverse condition. So for folks who are worried about being able to sell a property, enter into a 1031 agreement and be able to close, putting a specifying a Delaware Statutory Trust as one of their properties, it’s insurance because you’ve got certainty of close.

Rich Arnitz:
You have no closing risks. That’s correct. The transaction is completed. It’s already gone through a thorough due diligence, underwriting and the loans are already locked in. Where if you think about it, if I’m looking at a closing of a property myself, I have to go through and do the thorough underwriting. I have to go out and get a financing. I have to work with all these third party vendors. In a Delaware Statutory Trust, you have a team of professionals that have already done that for you. So you’re not doing the underwriting, you’re looking at it as an investment itself. So there’s no closing risks, there’s no competition.

Wally Smith:
And so it’s packaged that both the debt and the equity are already packaged. And the specific amount that you’re going to put in, if you sell a single family home for $454,000.23, you know that you can put that exact amount into a DST, you don’t have to worry about matching it up is, those are the rules. You have to go equal or up, both in value and also in the debt on a property. We can accomplish that to the penny with a DSG portfolio. We can perfectly match the equity and the debt in the deal.

Rich Arnitz:
Correct. And one of the benefits I think too of getting into a DST with an individual property allows you to diversify. And it allows you to diversify within the different portfolio. So you’re upgrading on the property itself to a commercial grade property, you’re getting out of the day to day management of it. You’re having it professionally managed and you’re also have assurance of close, but you’re also getting a diversified portfolio of commercial real estate in multiple different sectors that you could not probably afford to own on your own, but now you can afford within a trust itself.