Inside Investments: Delaware Statutory Trusts

Risk factorsThis material is prepared by Resource and is presented for information purposes only. This material does not constitute investment or tax advice and should not be considered a solicitation to buy or an offer to sell securities. Neither Resource, nor any company affiliated with Resource, provides tax or legal advice. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment time horizon. Any information included herein is intended to provide an overview of Delaware Statutory Trusts (DSTs) and 1031 Exchanges, and is not an exhaustive explanation of the rules and regulations applicable to a 1031 Exchange pursuant to Section 1031 of the Internal Revenue Code.

• Transactions involving 1031 Exchanges are complex, and it is recommended that investors seek the advice of tax, financial, and legal counsel prior to moving forward with a 1031 tax-deferred exchange.

• In evaluating DSTs, investors must rely on their assessment of process and its terms, including the risks involved. There are no guarantees that the methods described herein suit each investor’s needs.

• Like all assets, the health of the real estate markets is tied to the health of the economy. Real estate may lose part or all of its value in an economic downturn, or in the event of a credit market freeze. Investors should be aware of the point in the market cycle that a DST is acquiring properties. Those properties acquired when the market has appreciated may have greater principal and income risk than those acquired after the market has softened. All real estate is subject to risks associated with tenant vacancy, physical damage, unforeseen repairs, and overall fluctuations in value that may be outside the DST’s control.

• Many Delaware Statutory Trusts and 1031 Exchanges offer ownership interests in a single property, so investors may need to invest in multiple real estate investments to achieve diversification.

• 1031 Exchanges are highly complex and require strict adherence. Failure to follow these requirements may result in a complete loss of tax deferral. Investors should consult tax, financial, and legal counsel before going through with a 1031 Exchange.

* Resource is the marketing name for Resource Real Estate, LLC and its affiliates.

Resource Securities LLC, member FINRA/SIPC, distributes various investment products and is a wholly owned subsidiary of C-III Capital Partners LLC.

Resource* is an asset management company that specializes in real estate and credit investments. Its main objective is to be a best-in-class asset manager as measured by risk-adjusted returns to investors and the quality of the funds and businesses it manages. The company’s investments emphasize consistent value and long-term returns with an income orientation.

Resource is a wholly owned subsidiary of C-III Capital Partners LLC, a fully integrated asset management and commercial real estate services company, with over $8.8 billion in real estate and debt assets under management as of December 31, 2017.

About Resource

“Like-kind” real estate

Successfully completing a 1031 Exchange includes finding and acquiring one or more “like-kind” real estate properties. Any property that is held for investment will generally qualify. Examples of like-kind real estate include:

Basic requirements

When searching for and identifying potential replacement properties, the following requirements must be met to complete a 1031 Exchange.

A 1031 Exchange offers an effective strategy for deferring capital gains tax on a commercial real estate sale. The process consists of exchanging net proceeds of the sale for “like-kind” real estate, including fractional ownership through a Delaware Statutory Trust.

A Tax-deferred Real Estate Investment Opportunity

• Office buildings

• Multifamily properties

• Hotels

• Retail centers

Exchanging successfully for like-kind real estate may afford the opportunity to defer capital gains tax and build wealth.

• Data centers

• Industrial warehouses

• Tenancy-in-Common (TIC) interests

• Delaware Statutory Trust (DST) interests

New asset value of replacement

property

New debt on replacement

property

Cash invested in replacement

property

Relinquished property asset

value

Greater than or Equal to

The debt from the relinquished

property

Cash received from relinquished

property sale

To achieve complete tax deferral, a successful 1031 Exchange transaction must involve a qualified intermediary (QI) and follow a specific schedule. In a DST, the exchanger receives undivided fractional interest ownership in the property, instead of the property itself.

The 1031 Transaction Timeline

The role of a qualified intermediary

Since an exchanger cannot take constructive receipt of the relinquished property’s sales proceeds, a QI facilitates the 1031 Exchange by entering into a contract for the exchange of properties.

The 180-day Transaction Schedule

DAY 1 BY DAY 45 BY DAY 180

If a replacement property is not found within the 45-day window, tax deferment may be in jeopardy. Closing on the replacement property must be the earlier of 180 calendar days from closing on the sale of the relinquished property or the tax filing due date for the year in which the relinquished property was sold, unless tax filing extension was obtained.

Treasury Regulations define a qualified intermediary as a person who is not the exchanger or a disqualified person and enters into a written contract with the exchanger (the “exchange agreement”), acquires the relinquished property from the exchanger, escrows the sales proceeds, uses those proceeds to acquire the replacement property, and completes a transfer of the replacement property to the exchanger.

QI holds sales proceeds in trust or escrow account

Sell Your Property

Identify Replacement Property

Close on Replacement Property

QI transfers funds for purchase of replacement property

Prepares legal agreements and related documents and protects exchange funds during the process

Transfers the relinquished property to the new buyer and the replacement property to the exchanger, following the exchange agreement guidelines

Cannot have a financial relationship with exchanger within two years of closing on the exchange

A 1031 Exchange offers the potential to defer capital gains, along with the opportunity to achieve investment objectives through access to institutional-quality real estate.

Potential Benefits of a 1031 Exchange

1031 Exchanges May Offer:

Many 1031 Exchanges offer ownership interests in a single property, so investors may need to invest in multiple real estate investments, or in different regions or asset classes to achieve diversification.

Potential to defer capital gains tax on property sale proceeds

and build wealth

Access to commercial real estate by geographic region, asset

class, and ownership structure

Potential for steady, monthly income generated from operational cash flow

Potential growth in the underlying value of one or

more properties

Tax Deferral

Diversification

Steady Income

Capital Growth

• Greater access – Includes up to 1,999 investors, which may lower investment minimums

• Lower potential default risk – One real estate borrower and owner may lower an investment’s default risk

• True passive investing – Sponsor is responsible for due diligence, as well as property and program management

• No stress over exchange deadlines – Can close very quickly, lowering concern of missing the transaction deadlines

DSTs go one step furtherDSTs offer access to investment-grade commercial real estate. With that access comes differentiating benefits and an attractive avenue to complete a 1031 Exchange.

By deferring taxes, an investor may have greater net proceeds to invest. An example may help illustrate the potential advantages of utilizing this strategy. It is important to remember that the benefits of a DST will vary for each investor.

Calculating the Power of Tax Deferral

Hypothetical Scenario at Top Individual Tax Rate

Sells Property and Pays Taxes

Executes DST and Defers Taxes

Purchase Price $400,000 $400,000

Accumulated Depreciation1 $200,000 $200,000

Adjusted Cost Basis $200,000 $200,000

Sale Price $1,350,000 $1,350,000

Total Taxable Gain $1,150,000 $1,150,0002

Long-term Capital Gains (20% of $950,000)3 $190,000 $0

State Tax4 – –

Net Investment Income (3.8% of $1,150,000)3 $43,700 $0

Recapture Tax (25% of $200,000 Depriciation)3

$50,000 $0

Total Taxes Due $283,700 $0

Net Proceeds for Reinvestment

$866,300 $1,150,000

This hypothetical scenario is prepared by Resource and is presented for information purposes only. This material does not constitute tax advice.

1 This assumes straight-line depreciation for 20 years on an asset with a 40-year recovery period.

2 Taxable gain is deferred (not eliminated) when sale proceeds are rolled directly into DST.

3 This hypothetical calculation places the taxpayer in the highest federal income tax bracket. You may have a reduced tax benefit if your tax rate is lower.

4 This illustration does not consider the potential benefits of state capital gains tax deferral. This benefit will vary by state. Please consult tax, legal and accounting professionals for more information applicable to you.

Compliance with these regulations allows a DST to offer undivided fractional interest ownership in real estate for federal income tax purposes.

A DST must meet certain requirements, commonly referred to as the “seven deadly sins,” under IRS Revenue Ruling 2004-86 to qualify for use in a 1031 Exchange. These rules ensure that DST funds are distributed properly and great risks are not taken with the assets.

DST Qualifications

Only accept investor contributions through the offering’s close

Limit capital expenditures to normal repair, non-structural improvements, and those required by law

Work within existing loans and funds held as of the offering’s close

Only invest all liquid cash held in the DST between distributions in short-term debt

Maintain only its current lease without renegotiation

Distribute all asset sale proceeds to investors

Distribute all net cash outside necessary reserves to investors

1

4

Shares are not diluted after the offering closes

Prohibiting large improvements may limit investment risk

Prohibiting future liabilities may limit investment risk

Investing limited to low-risk instruments may preserve the DST’s value

Promotes a potentially more secure investment

Right to determine how and when to reinvest capital earned from the investment

Receive cash distributions on a predictable schedule

Potential Investor Benefit

2

5

7

3

6

Following the Rules

To learn more about Delaware Statutory Trusts, visit www.ResourceAlts.com or call (866) 773-4120.

1845 Walnut Street, 18th Floor | Philadelphia, PA 19103(866) 773-4120 | www.ResourceAlts.com RRE-BRC-015-Z01

1031 Exchange - Section 1031 of the Internal Revenue Code (“Section 1031”) provides that, in general, no gain or loss shall be recognized on the sale of property held for productive use in a trade or business or for investment if the proceeds are used to acquire a like kind property. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind,” while deferring the payment of federal income taxes and some state taxes on the transaction. There are numerous Section 1031 rules and requirements, including, but not limited to: sellers cannot receive or control the net sales proceeds; replacement property must be like-kind to the relinquished property; the replacement property must be identified within 45 days from the sale of the property; the replacement property must be acquired within 180 days from the sale of the original property; and the attributed debt placed or assumed on the property must be equal to or greater than the attributed debt on the relinquished property to avoid boot.Constructive Receipt – Control over exchange funds or other property, including having money or property from a 1031 Exchange credited to a bank account or property or funds reserved for an investor. An investor in constructive receipt of exchange funds or property during a like-kind exchange transaction may loss tax deferral. An investor’s Qualified Intermediary must be in receipt of the relinquished property’s proceeds during the transaction.

Exchange Period – The time period during which an investor must complete a 1031 Exchange transaction, concluding with the acquisition of the like-kind replacement property. The exchange period lasts for 180 days from the sale of the investor’s relinquished property, or the due date (including extensions) of the investor’s income tax return for the year in which the like-kind exchange took place, whichever comes first.Identification Period – The 45-day time period during which an investor must identify potential “like-kind” replacement properties for a 1031 Exchange.“Like-kind” Real Estate – Any two assets, including a relinquished property and replacement property, that are deemed the same type under federal income tax law. Like-kind property is any real estate not held for personal use, including a vacation home.Qualified Intermediary – The qualified intermediary is responsible for facilitating a successful 1031 Exchange transaction. The qualified intermediary is a third-party that holds exchange funds in escrow and facilitates the process to closing on a replacement property.Relinquished Property – The initial property surrendered by the investor and sold by the qualified intermediary.Replacement Property – The like-kind real estate property to be acquired or received by the investor after the qualified intermediary’s purchase from the seller in a 1031 Exchange.

Definitions

Resource Securities LLC, Member FINRA/SIPC.

The above communication is intended to be educational in nature and provide additional resources for current and/or prospective clients. Resource derives most, if not all, of its revenue based on the sale of its various products. While subject to change, Resource has a non-traded REIT and two interval funds available to investors. This is neither an offer to sell nor a solicitation of an offer to buy a Resource product; an offering is made only by prospectus or other offering memorandum. This information must be preceded or accompanied by a prospectus in order to understand fully all of the implications and risks of the offering. Neither the Attorney General of the State of New York nor any other state regulators have passed on or endorsed the merits of a Resource product. Any representation to the contrary is a criminal offense.

Investing in real estate or credit products involves a high degree of risk and uncertainties which should be carefully considered when making an investment decision. If any of the risks were to occur, the value of your investment may decline, and you could lose some or all of your investment. Some of these risks related to available Resource products may include the following: no public market exists for the investment and liquidity by a specified date is not guaranteed; the purchase price of your investment may not reflect the underlying value of the security; limited operating history for the program; no investments identified to acquire with the equity raised; dependence on an external advisor to select investments and to conduct operations; payment of substantial fees to the advisor that increase the risk investors will not earn a profit on their investment; conflicts of interest; the use of leverage to acquire investments; restrictions on the ownership and transferability of an investment; distributions may be sourced from offering proceeds or borrowings. Refer to the applicable offering document for a complete set of risk factors. Offering materials and offering-specific risk factors for Resource products may be found at www.resourcealts.com.