Now is a good time for a lender to jump into the market of making loans on Delaware 1031 Trust buildings. The real estate market is rapidly changing. Real estate prices are swinging upward.
The trust is generally a good investment, but anything can happen. Things can change quickly, and there is always a risk. Lenders must carefully step around those risks if possible.
He must be wary. In this trust, if the building should go into default, the property reverts back to the lender because the loan is usually non-recourse.
The Borrower
Before lending in this real estate trust, the lender carefully considers the past performance of both the property and the borrower.
Each property generally needs a loan and, therefore, a borrower and a lender. A lender looks for a property of good quality that should have a good record and hopefully increase value.
A real estate lender will look for a single entity, one person or one business, to borrow the money.
The loan should be secure from bankruptcy, not affected by the borrower’s credit or financial behavior. The lender is looking for a borrower with solid financial records and some reserves.
In this trust, there are investors who own shares in the building, but investors have no say in the loans or any management decisions. As a result, he cannot renegotiate a loan or deal with the management. His is passive income.
The Property
Delaware statutory trust(DST) is becoming popular due to several factors; the public is aging. Baby boomers are reaching retirement age and selling property that has accrued profit. Those profits from investments in real estate can avoid Capital Gains taxes if funds are reinvested in real estate within a time period.
This is a positive investment area from the lender’s side, as the country is again in turmoil. It is a good time to lend on these trusts. Real Estate is a good risk, but still a risk. For example, a giant superstore might close its doors. A lender has to be wary and do some research.
A property that currently has a long lease of 5 to 20 years with stable lessees is preferable. These leases don’t need constant yearly renewing or finding new lessees. A new lease often requires a time with no building occupancy and a possibility of default that comes with it.
Debt on the investments under the DST is mainly non-recourse, which means the property that holds the loan is the only property involved.
The lender is looking for institutional-grade property leased by professionals or institutions such as Walmart or a hospital.
The lender looks for companies that lease the building, are strong and stable financially, and show growth.
A lender does not want a property to be returned damaged through neglect. If the lessee is neglecting the care of the building, it may not be known until it is too late. The lender does not need a building that comes with significant repairs when it reverts back. Therefore, it is important for the lender to carefully research, so this does not happen.
Management
The third finger in this business is a management firm. This, too, is an important aspect of the loan. It is important to have the knowledge and proper control of the investors and property. If the property needs repairs that are not under the contract of the lessee, such as a new roof, it falls on the management firm to take care of it.
The Seven Deadly Sins
The IRS sets limits on the trust and lenders. The loans can not be renegotiated once finalized. The seven deadly sins benefit the lender. Only one loan may be made to one DST trust. DSTs have entity provisions that will not allow the bankruptcy of the beneficiaries to affect the property.
Conclusion
Loans on real estate have long been a reliable business. The loan market was good in the 2008 period when there was a financial crisis. Now the market is upset again. Investors look for deals to diversify their investments. Both investors and lenders are looking for ways to reduce their risks. DSTs are a sound way to do this.