Guide to Securitized Real Estate Investments

Alternative investments like real estate have become an essential component of investment portfolios that potentially offer different risks, more tax-advantaged income, and greater diversification than public market options.

Table of Contents

What is a Securitized Real Estate Investment?

Assets vs. Structure

A Note on Real Estate Programs

Real Estate Investment Trusts (REITs)

Real Estate LPs and LLCs

§1031-Eligible DSTs and §721 UPREITs

Qualified Opportunity Zone (QOZ) Funds

Mineral Rights

Preferred Shares

Interval Funds

What is a Securitized Real Estate Investment?

When assets are “securitized” it means a sponsor—a firm that creates securitized investments— has created a separate company and is offering interests, units or shares of “securities” that investors can purchase in order to invest (directly or indirectly) in the assets. For example, a sponsor may acquire a property for development, then invite additional passive investors who will participate in the financial success or failure of the project. Economically, each investor is a co-owner of the project, but their legal ownership depends on the structure of the offering. Investors could become tenants-in-common, LLC members, general partners, limited partners or REIT shareholders, just to name a few common possibilities. Regardless of the entity or legal ownership, the investment offering represents a sale of securities because the ultimate performance of the development project depends on the efforts of the sponsor, rather than the investors. Such an investment may seem like a real estate transaction AND a securities purchase. However, real estate agents cannot offer programs that require a securities license.

For purposes of this guide, securitized alternative investments are “non-traded.” Non-traded investments are neither bought nor sold on a national securities exchange. Instead, investors purchase interests, units or shares directly from the issuer/sponsor. Investors typically redeem their interests back to the issuer when a redemption program exists. In limited circumstances there may be a thin secondary market for non-traded interests, but in most cases there is no opportunity to cash out before the entire program liquidates. Buyers should expect to hold their shares for multiple years. Conversely, traded or “listed” investments— stocks, exchange traded funds (ETFs), commodities and options—are securities that trade on an exchange such as the New York Stock Exchange (NYSE). The prices of traded securities fluctuate widely throughout the week, day or even hour ( volatility ), but on average they tend to move together over time. This tendency of a security’s market value to move similarly to other securities or indices is known as correlation . Traded securities are considered highly liquid, but liquidity comes at the cost of increased volatility and higher correlation .

The short-term price movements of a traded security may bear little resemblance to actual changes in the value of its underlying assets.

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Securitized real estate often falls in the category of alternative investments. “Alternative” is a more difficult term to define, and—fairly or unfairly—can have either a positive or negative “alternative lifestyle.” Generally, the securities industry has pinned the label “alternative” on assets not brokered or packaged by Wall Street. Ironically, real estate—the original asset class— eclipses stocks in total market value, yet real connotation, as with “alternative milk,” “alternative music,” or the very loaded

Non-traded programs provide an investor experience that more closely resembles the financial behavior of the underlying assets.

estate is considered an “alternative” investment, both by Wall Street and its regulators.

This guide does not include the entire universe of non-traded alternative investments. Programs described below generally are:

Securitized alternative programs also generally have higher fees and commissions than either traded or directly-owned versions of the same assets. Ideally these costs are justified by management effort, expertise and value, and mitigated by the inherent long-term nature of “alts.” Understanding fee structures and expenses is critical to successful investing. The table on page 7 includes common examples of various fees and expenses that may come with securitized alternative investment programs. Most importantly, all non-traded alternatives below provide returns based on the performance of the actual underlying assets. If we could say the same for Wall Street, we would not need any “alternatives."

Widely syndicated through independent broker-dealers

Subject to multiple layers of due diligence

Pass through to investors the tax treatment of their assets

Most of these investments are available only to investors who meet state concentration/income standards or federal accreditation standards. Generally, they are not subject to “double” taxation.

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Assets vs. Structure

It is possible to invest in the same asset but have a different investment experience, depending on the structure of the offering. For example, consider the same Class-A multifamily property generating stable cash flow, but structured within two different non-traded alternative investments:

NON-TRADED STRUCTURE

Example Asset: Class-A Multifamily Property with Stable Occupancy

- Large public portfolio fund - Quarterly redemption option - Established sponsor

- Private single-asset fund - No liquidity during hold period - New up-and-coming sponsor

Quarterly redemption program, typically with a periodic cap on total redeemable shares, possibly subject to withdrawal fee

Ability to access invested funds

No option to redeem; transferability limited in first year per SEC rules

Fund required to hold significant percentage of equity as liquid cash, typically at a much lower interest rate than the core fund assets—this lowers overall performance of fund shares Fund required to have board with independent directors, pay SEC registration fees, provide audited financials, make ongoing public filings and comply with Sarbanes-Oxley Act With a large sponsor and the ability to cross-collateralize assets, this fund negotiated a lower-than-average interest rate to acquire the property

Fund not required to maintain pool of cash to redeem shares; other than reserves, all equity is invested in core fund asset

Impact of liquidity on fund performance

No board of directors, no public filing fees, lower accounting costs—but fund and sponsor information may be less transparent and less accessible

Organizational expenses

With a newer sponsor and no other properties, this fund negotiated a higher-than-average interest rate, thereby impacting net distributions

Debt service

The performance of this property— good or bad—is diluted by the results of multiple other properties

Performance of the fund rests entirely on the results of this one property

Egg/basket ratio

The hypothetical example is for illustrative purposes only and does not guarantee results. Individual results may vary. Potential cash flows are not guaranteed and could be lower than anticipated. *

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A Note on Real Estate Programs

Risks and Expenses

Yet securitized real estate investing may also include, but is not limited to:

Opportunity for both current income and long-term appreciation Multiple tax benefits for real estate ownership Lower price volatility Reduced correlation to other Wall Street investments Whether you hold title directly, via a family partnership, or in a syndicated investment program, there are multiple common attributes of non-traded real estate ownership: *

1. 2. 3.

Operational risks Leverage risks Tax-law-change risks

4. Transaction risks 5. Tenant risks 6. Regulatory risks 7. Illiquidity 8. Fees and expenses – see below 9. Macroeconomic risks

The potential benefits and drawbacks of real estate investing will vary across sector and geography, but also by program structure and sponsor. If real estate has a place in your portfolio, then your circumstances, preferences, and tax situation will inform your decision on the type of program in which to invest. The specific opportunities, risks and expenses of each investment program are explained in the prospectus or offering memorandum.

Up-front Costs

Management Phase Costs

Back-end Costs

Organizational costs Syndication expenses Sales commissions Acquisition expenses

Asset management fee Revenue participation Master lease supplemental rent

"Waterfall" profit participation Transaction expenses

Conversion fee Disposition fee

Financing costs Acquisition fees

The foregoing is not a complete list of all the risks related to this investment strategy. Investors should review the "Risk Factors," section in the private placement memorandum, prospectus or offering memorandum. * Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. **

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Correlation

S&P 500

100 4500

75 3500

50 2500

25 1500

Commercial Property Price Index

150

100

75 125

50 100

0 50

All Property CPPI® weights: retail (20%), office (17.5%), apartment (15%), health care (15%), industrial (10%), lodging (7.5%), net lease (5%), self-storage (5%), manufactured home park (2.5%), and student housing (2.5%). Retail is mall (50%) and strip retail (50%). Core Sector CPPI® weights: apartment (25%), industrial (25%), office (25%), and retail (25%). You cannot invest in a real estate index, and a metric such as the Green Street CPPI is not a proxy for any particular real estate portfolio. However, as this chart indicates, while the broad stock and real estate markets demonstrate some general correlation during major recessions, the short-term volatility of the stock market is more pronounced that that of institutionally-owned real estate.

Past performance is not indicative of future results. The S&P 500 Index is a widely recognized capitalization-weighted index that measures the performance of the large-capitalization sector of the U.S. stock market. The Commercial Property Price Index (CPPI) is a time series of unleveraged property values across these sectors and markets, and captures the prices at which commercial real estate transactions are currently being negotiated and contracted. *

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Lease Duration

Lease Structure and Cap Rates

Unlike your home, investment properties trade at prices based primarily on capitalization rates (“cap rates”)—the average net operating income (“NOI”) that buyers expect to receive as a percentage of purchase price. Cap rates for any type of property change over time, a function of three important variables: interest rates, available market capital and perceived operating risk. If a specific building maintains a flat NOI, its future value is entirely dependent on how these forces move the applicable cap rate for such a property. Put another way, if prevailing cap rates go up, a property’s NOI must increase proportionally to maintain its value, notwithstanding transaction costs. To actually appreciate, a property’s NOI must outpace any upward trend in cap rates. For properties with long-term leases and contractually predetermined rental revenues, it may be algebraically impossible to achieve appreciation if cap rates rise during ownership. Therefore, investors should strongly consider where to invest along the spectrum of lease structures:

LONG-TERM, SINGLE TENANT LEASE

LONG-TERM, MULTI TENANT LEASE

MID-TERM, MULTI TENANT LEASE

SENIOR HOUSING

APARTMENT COMMUNITY

SELF-STORAGE

HOSPITALITY

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Real Estate Investment Trusts (REITs)

REITs typically comprise several or even hundreds of institutional-caliber investment properties or real estate-related debt instruments. REITs were developed to allow individual investors access to portfolios of large- scale, income-producing property while receiving a “pass-through” of real estate tax benefits. REIT types include apartments, warehouses, offices, shopping centers and healthcare facilities. Some REITs are diversified across multiple sectors, while others focus on a specialized niche.

In the 1960s, REITs were formed under a business trust structure—hence the “T” in REIT. But today most REITs are limited partnerships in which a corporation with public common shares is the general partner. To qualify as a REIT under IRS rules, a company must invest almost exclusively in real estate, and it must pass at least 90% of its taxable income to shareholders annually, usually as monthly or quarterly payments. Sometimes these payments are called “dividends,” though technically they are “distributions.”

A typical REIT structure:

Service Providers

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Private companies are not required to comply with Sarbanes-Oxley audit rules and costly reporting requirements. However, many REITs that begin as private placements can be required to register as public companies after reaching a certain size.

People often confuse “listed” or “traded” securities with “public” securities. Many companies are registered publicly with the Securities and Exchange Commission (SEC) without selling their shares on a stock exchange. Examples of public, non-traded companies are mutual funds, interval funds and non-traded REITs. In a “public” offering, its shares have been registered with the SEC. A public company is subject to numerous additional rules, ongoing reporting requirements and considerable compliance costs. With this public transparency comes the right to market nationally to a broad group of potential investors, subject to some state regulations. Public offerings are sold subject to a registered prospectus. Conversely, the shares of a “private” company are not registered with the SEC, and therefore the sale of its securities are limited—typically to “accredited” investors. These offerings are described in a Private Placement Memorandum (PPM). 2 1

TAXATION NUTSHELL —REIT investors receive a 1099, and the majority of distributions are taxed as ordinary income. However, taxpayers generally may deduct 20% of the qualified business income amount (through December 31, 2025). REIT shareholders may offset their income with a pro-rata share of portfolio depreciation. Often the depreciation deduction nearly or entirely offsets investors’ otherwise taxable income from a REIT. Of course, these deductions reduce cost basis, and will trigger depreciation recapture if REIT shares are liquidated before death. For many investors, deducting depreciation is a trade-off. Income tax is reduced today in exchange for a capital-gains tax in the future— unless the shares are passed to heirs and receive a “step up” in cost basis. 3 3

All traded or “listed” REITs are public, but not all public REITs are traded. Here are some key differences:

Purchase

Sale

Share Price

Transaction Cost

Price based on hourly fluctuations and highly correlated to stock market Price based on periodic valuations of underlying investment portfolio 5

Shares bought on a national exchange

Traded REITs

Shares sold on a national exchange

Shared brokerage fees

Offering costs, commissions, acquisition fees; back-end participation fees

Shares bought directly from issuer

Shares sold back to issuer per limited share redemption plan 4

Non-Traded REITs

1. 2. 3. 4.

https://www.irs.gov/newsroom/facts-about-the-qualified-business-income-deduction https://www.nasaa.org/wp-content/uploads/2011/07/g-REITS.pdf https://www.sec.gov/oiea/investor-alerts-and-bulletins/private-placements-under-regulation-d-investor-bulletin

Share redemption plans are discretionary and can be suspended; funds available for redemption, if applicable, may be limited to only those funds received from dividend reinvestment, but many “Daily NAV” REITs offer annual aggregate liquidity up to 20% of the NAV of average outstanding shares The frequency and methodology of valuations varies across non-traded REITs, and are based on appraised estimates in the absence of actual property sales See the Use of Proceeds section of a REIT PPM to understand the full extent of fees, which vary across programs

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Real Estate LPs and LLCs

LPs/LLCs typically invest in a smaller portfolio—perhaps one property—with only a fraction of the organizational overhead of a REIT. LP/LLC investors do not benefit from the same degree of reporting, transparency and corporate oversight as a public REIT. LP/LLCs typically offer no liquidity until the project is completed and/or the portfolio is sold. Interests in Limited Partnerships (LPs) and Limited Liability Companies (LLCs) are sold almost exclusively as private placements (see page 11 regarding private vs. public offerings).

estors receive a 1099, and the majority of income. However, taxpayers generally may ess income amount (through December 31, ffset their income with a pro-rata share of reciation deduction nearly or entirely offsets e from a REIT. Of course, these deductions depreciation recapture if REIT shares are vestors, deducting depreciation is a trade-off. hange for a capital-gains tax in the future— eirs and receive a “step up” in cost basis.

These offerings often have more targeted strategies than larger programs. Examples include:

Senior housing development

Industrial

Adaptive redevelopment

Hotels

Single-family construction

Distressed/opportunistic

Self-storage

Multifamily construction

Mortgage lending

Sponsors of LPs/LLCs may have a greater financial stake in the underlying project, and participate more substantively in the overall return compared to structures such as listed REITs. Sometimes known as a “waterfall” formula, the algebra for calculating a sponsor’s share of LP/LLC performance can be complicated.

TAXATION NUTSHELL —LP/LLC investors receive pass- through benefits of depreciation. In construction or redevelopment programs, accelerated depreciation of new fixtures and equipment may provide greater up-front tax benefits than more traditional buy-and-hold real estate. As partners for IRS purposes, LP/LLC investors receive K-1 forms rather than 1099 tax forms.

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§1031-Eligible DSTs and §721 UPREITs

Please visit our website at www.1031capitalsolutions.com/resources to view these and other educational documents regarding Delaware Statutory Trusts and UPREITs, which may be used as passive replacement strategies for §1031 exchanges.

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Qualified Opportunity Zone (QOZ) Funds

A QOZ fund is an LP, LLC or REIT that invests in properties located in Qualified Opportunity Zones (QOZs). Per the “Invest in Opportunities Act” of 2017, a QOZ is a neighborhood designated by the government to offer certain federal tax incentives for development or revitalization. As of April 2022, there are over 8,700 QOZs in the United States. 8 7

Most of these funds include multiple projects across different zones. Some funds have contractually secured their projects before commencing their offering, while other funds have not “tied up” all projects in advance of raising capital

QOZ funds are offered as private placements (see page 15 regarding private vs. public offerings) QOZ funds aggregate capital from investors to acquire and complete development/revitalization projects in these zones

To designate specific zones, government officials applied QOZ criteria in 2018 to census data from 2010—when many census tracts had not yet bounced back from the Great Recession. It is likely that many of these zones would have exceeded the maximum income thresholds if the boundary-drawers had been required to use 2018 data. As a result, many QOZ projects likely would be built regardless of the zone boundaries, on the basis that economic and demographic conditions already supported the demand for the proposed apartment building or hotel or self-storage facility.

Most QOZ funds generate no income during the first several years of the fund. However, because construction is at the far end of the real estate risk-reward spectrum, the potential total return from a QOZ fund may be higher than other non-traded alternative investments. Typical offerings range from $100 to $500 million of equity raised. Some programs include a plan to refinance the project and provide partial liquidity to investors for the purpose of paying deferred capital gains taxes.

7. https://www.irs.gov/credits-deductions/businesses/opportunity-zones 8. https://opportunityzones.hud.gov/resources/map

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Example: asset sold in 2020 with gains re-invested in a QOZ fund

100

Basis in QOF investment stepped-up to fair market value Elimination of capital gains tax on QOF appreciation

Capital gains taxes due on the portion of the original deferred capital gain not previously stepped-up

Asset Sale- generating capital gain

Deferred zero-basis capital gain stepped-up 10%

Investment in QOF

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

9. https://www.irs.gov/newsroom/opportunity-zones QOZ funds typically have no operating history. QOZ funds offer and sell interests pursuant to exemptions from the registration provisions of federal and state law and, accordingly, those interests are subject to restrictions on transfer. There is no guarantee that the investment objectives of a QOZ fund will be achieved. Investment in a QOZ fund require a long-term commitment, with no certainty of return. There can be no assurance that a QOZ fund will complete the acquisition of any of the investments that have been identified as potential acquisition targets. An investment in a QOZ fund may not qualify under Code Section 1400Z-2 for tax deferral. A QOZ fund is subject to risks related to qualifying under Code Section 1400Z-2 as a QOF, including, but not limited to: failing to maintain its qualification as a QOZ fund or being decertified; there being no clear guidance on “reasonable period of time to reinvest the return of capital” by a QOZ fund; complying with the working capital safe harbor; complying with the “original use” test; complying with various restrictions on transactions with related parties; and complying with the 90% Test. Changes in tax laws related to Code Section 1400Z-2 may adversely impact the Fund. Nothing herein should be interpreted as offering tax or financial advice, and investors must consult their own experts prior to making the decision to invest. To be eligible for QOZ tax benefits, prospective investors must generally invest an amount of cash up to their Eligible Gain (which is generally defined as gain treated as a capital gain for U.S. federal income tax purposes) within 180 days of the date of the sale or exchange that gives rise to such Eligible Gain. For certain Eligible Gain (e.g., capital gain dividends from a REIT or RIC, Code Section 1256 contracts, installment sales, Code Section 1231 gain from partnerships), the 180-Day Period may begin on the last day of the taxpayer’s taxable year. A QOZ fund’s income tax returns may be audited by the IRS. An audit may result in the challenge and disallowance of some of the deductions described in such returns. QOZ funds typically do not have distributable income until its investments have been stabilized, which may take a substantial amount of time. The actual amount and timing of distributions paid by a QOZ fund is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. A QOZ fund depends on tenants for their revenue and may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants. The financial performance will depend on the ability to attract and retain tenants. Disruptions in the financial markets, evolving regulations and challenging economic conditions could adversely affect any QOZ fund. Property acquisitions are subject to mitigation of all environmental issue resolution and may impact project design. Future legislation could negate or dissolve any tax benefits an investor expects to receive. The Fund and its subsidiaries may be exposed to substantial risk of loss arising from investments involving undisclosed or unknown environmental, health or occupational safety matters, or inadequate reserves, insurance or insurance proceeds for such matters that have been previously identified. In addition, environmental concerns may result in specific restrictions or requirements related to the design and construction of projects. The success of a QOZ fund will depend, in large part, upon the skill and expertise of key involved persons. These individuals are not required to devote all of their time to the fund’s affairs. QOZ fund investors have no opportunity to control the day-to-day operations, including investment and disposition decisions of the Fund. If structured as a limited partnership, the General Partner of a QOZ fund and certain of its affiliates will receive certain compensation from the fund and the portfolio entities for services rendered in some cases, regardless of whether any sums are distributed to limited partners. * The hypothetical example is for illustrative purposes only and does not guarantee results. Individual results may vary. Federal capital-gains taxes deferred until after December 31, 2026. This date may be extended for future groups of investors under amended legislation. If a taxpayer holds a QOZ fund investment for ten years, any capital gains produced by the fund will be disregarded for federal tax purposes. For those who invested in a QOZ fund before the end of 2021 and hold the investment for five years, there was effectively a 10% discount on deferred federal capital gains taxes. It is possible that this timeline could be updated. A handful of states, including California, have chosen not to conform with federal QOZ laws; residents may defer federal capital gains tax but not their state tax. TAXATION NUTSHELL —QOZ rules allow taxpayers to sell any appreciated asset that would otherwise trigger a capital gain, and defer the taxes by reinvesting the gains into a QOZ fund. This is distinguished from a 1031 exchange, whereby one must replace the entire asset that was sold in order to completely defer taxes. To receive the tax-deferral benefit, taxpayers have 180 days to reinvest their gains into a QOZ fund, notwithstanding an emergency declaration. Once invested in a QOZ fund, there are three separate and distinct tax benefits:

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Mineral Rights

Mineral Interest Under common law, a real property landowner owned the land, including everything to the sky above and down to the depths below. Yet a landowner can sever the surface estate from the mineral estate, also called the “mineral interest,” and each estate is considered an interest in real property. The severance of the mineral interest is achieved with a deed. It can be further divided and severed, as follows: Right to develop–enter, occupy and make such use of the surface as is reasonably necessary in the exploring, drilling, mining, removing and marketing of the minerals Right to lease–execute oil, gas and mineral leases, thus conveying the right of exploring, mining, removing and marketing to one or more lessees Right to receive bonus payments–receive from the working interest owner an initial lease bonus usually computed on a per-acre basis Right to receive delay rentals–receive payment from the lessee to maintain an oil and gas lease during the primary term without drilling Right to receive royalty payments–share a percentage of production under the oil, gas and mineral lease, or the proceeds from the sale of such production, without the burden of drilling, operating and production costs * *

PASSIVE

Mineral rights are the deeded, income-producing real estate beneath the surface.

LIMITED LIABILITY

POTENTIAL BENEFITS OF OWNING MINERAL RIGHTS

RELATIVE LIQUIDITY

RECURRING INCOME *

USE TAX CODE 1031

Royalty Interest A royalty interest is created when a mineral interest owner signs an oil, gas and mineral lease. Upon the execution of a lease, the lessee gains the exclusive right to drill and develop the minerals. In return for gaining the right to develop the minerals, the lessee agrees to pay the mineral interest owner a royalty on any oil and gas produced during the term of the lease. A non-participating royalty interest owner is entitled to a share of production under the oil, gas and mineral lease, or the proceeds from the sale of such production, without having to bear or participate in any of the costs of drilling, development and operations. The owner of a royalty interest generally is not required to pay any portion of the costs of drilling or operating the wells on the leased acreage.

* Potential cash flows are not guaranteed and could be lower than anticipated.

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Working Interest A working interest owner is the person who owns the oil and gas lease—so called because the working interest owner is entitled to “work” the land by drilling and developing the minerals. The working interest owner is also liable for all of the costs of operations. The term “working interest” is usually used to distinguish that interest from the royalty and other non-cost bearing or non-participating interests. Because a royalty interest is a share of production free of costs, the working interest owners must pay the royalty “off the top,” thus reducing the revenue available to recoup their drilling and operating costs and turn a profit. Most investors indirectly hold working interests via a limited partnership offering, either as general or limited partners. General partners have greater liability, but are entitled to increased deduction benefits.

Overriding Royalty Interest (ORRI) An ORRI is carved out of the lessee’s interest (or the working interest) under an oil and gas lease, creating an interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner’s royalty reserved to the lessor in an oil and gas lease. Unlike a royalty interest, an overriding royalty interest owner does not own the minerals. Rather, an ORRI owner owns a right to a portion of the proceeds of produced minerals. The ORRI is carved out of the leasehold interest (or working interest); ORRIs generally conclude when the lease terminates.

TAXATION NUTSHELL —Owners of working interests can deduct both intangible and tangible costs. Intangible drilling costs (IDCs) are costs necessary to prepare wells for production, but have no salvageable value. IDCs include wages, fuel, chemicals, hauling, supplies, ground clearing, survey work and repairs. Approximately 60-85% of total drilling costs are intangible. IRS regulations allow well owners (investors) to deduct 100% of IDCs against their income in the first year. Tangible drilling costs (TDCs) are the components of a well that have salvageable value. TDCs include certain heavy equipment, casings, pump jacks and wellheads. IRS regulations allow investors to deduct 100% of TDCs against their income over the course of seven years. The extent to which an investor can deduct IDCs or TDCs against income depends in part on whether the investor is a general partner or limited partner. Royalties are taxed as ordinary income, but may be partially offset by the percentage depletion allowance. Percentage depletion is a modest tax advantage for royalty owners. It is calculated by applying a reduction of 15 percent to the taxable gross income of a productive well’s property. The allowance cannot exceed 65 percent of taxable income, and is limited to the first 1,000 barrels of oil (or 6,000 mcf of natural gas) produced per day. Some mineral interest offerings are designed to be eligible as like-kind replacement property in a §1031 exchange. Taxpayers may acquire fractional, deeded interests in a “basket” of mineral rights across several properties in multiple jurisdictions. The program sponsor then handles the revenue collection, accounting and reporting for all of the royalties in the basket.

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Here are the key differences among mineral rights:

Non-Participating Royalty Interest

Overriding Royalty Interest

Mineral Interest

Working Interest

Generates Revenue from Well Production

Yes

Owns the Underground Minerals

Yes

Ownership Continues after Production Stops

Yes

Collects Upfront Lease Bonus Payments

Yes

Has Executive Interest- Leasing Rights

Yes

Pays to Operate or Drill the Well

No (unless participating)

Yes

Participates in the Lease Operating Expenses

No (unless participating)

Yes

Significant Tax Advantages

No (unless participating)

Yes

The drilling of oil and natural gas wells involves the risk that the well will not provide enough revenue to return the amount of your investment. The revenues are directly related to the ability to market the oil and gas and their price, which is volatile and cannot be predicted. If oil and/or gas prices decrease, then your investment return will decrease. If you choose to invest as an investor general partner, then you will have unlimited liability during the drilling of the wells for partnership obligations until you are converted to a limited partner. However, you will continue to have the responsibilities of a general partner for partnership liabilities and obligations incurred before the effective date of the conversion. There is a lack of liquidity or a market for the units. Investors have total reliance on the sponsor or managing general partner and its affiliates. Investors may owe taxes in excess of their cash distributions from a partnership. The investor’s deduction for intangible drilling costs may be limited for purposes of the alternative minimum tax. Distributions may be a return of capital. There is a risk that demand for energy, including for oil and gas, and commodity prices will be decrease. There may also be the possibility of increased opportunities due to the impact of these factors on others. The potential impacts should be considered by you in making any investment decision.

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Preferred Shares

Preferred shares (also known as preferred stock) are securities that represent ownership in a corporation, with a priority claim over common shares with respect to the company's assets and earnings. In the context of securitized, non- traded alternative investments, preferred shares are not listed on an exchange, though the common shares of the company could be traded. Convertible preferred shares are securities that an investor can choose to exchange for a certain number of shares of the company's common stock, after a predetermined time span or on a specific date. Redeemable preferred shares provide an option (subject to restrictions on timeframe and pricing) to redeem the shares back to the issuer in the future. The per-share purchase price for preferred shares typically is fixed during the offering period. Most preferred shares are designed to provide the potential for steady monthly or quarterly dividend income, typically at a fixed annualized rate. Payments to holders of preferred shares must have priority over payments to common shareholders. *

An investor in preferred shares typically values the opportunity for enhanced income over the opportunity to participate in potential appreciation of the issuer’s underlying assets. Of course, those assets (real estate, energy, intellectual property, manufacturing, etc.) generate the gross revenue from which the preferred dividends are paid, but the ultimate behavior of the preferred share price will be less correlated to the assets than the common share price.

PREFERRED STOCK

COMMON STOCK

BOTH HAVE INVESTMENT RISKS AND PAY DIVIDENDS

VOTING RIGHTS DIVDENDS FLUCTUATE MORE VOLATILITY

NO VOTING RIGHTS DIVIDENDS ARE SET LESS VOLATILITY

* Potential cash flows are not guaranteed and could be lower than anticipated.

Generally, there is no public market for non-traded preferred shares, and preferred shares are not rated. The ability to redeem preferred shares may be limited. Corporate charters or regulations may contain restrictions upon ownership and transfer of preferred shares, which may impair the ability of holders to acquire or dispose of preferred shares. Dividend payments on preferred shares are not guaranteed and may bear a risk of redemption by the issuer. Cash distributions received may be less frequent or lower in amount than expected. Rates of distribution will not necessarily be indicative of operating results. If distributions are paid from sources other than cash flows from operations or earnings, the issuer will have fewer funds available for the acquisition of assets, and overall return may be reduced. For real estate companies, upon the sale of any individual property, holders of preferred shares may not have a priority over holders of common stock regarding return of capital. Percentage of ownership may become diluted if the issuer incurs additional debt or issues new shares of stock or other securities, and incurrence of indebtedness and issuances of additional preferred stock or other securities may further subordinate the rights of the holders of common stock and preferred stock. Investors may experience dilution in ownership percentage of preferred shares if they do not participate in the issuer’s dividend reinvestment plan. In addition to the operational risks of the issuer, holders of preferred shares will be subject to inflation risk, interest rate risk and reinvestment risk. Holders of preferred shares typically have no control over changes in policies and operations, and have extremely limited voting rights. Management typically has broad discretion in the use of the net proceeds from preferred-share offerings and may allocate the net proceeds in ways that some stockholders may not approve.

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Interval Funds

An “interval fund” is a type of closed-end fund that continuously offers new shares for sale, but buys back existing shares only during specified periods, or intervals. By limiting liquidity, a fund manager may be able to deploy strategies that allow for longer-term investments, as opposed to the traded stocks that underly most mutual funds. Because interval funds are public and registered under the Investment Company Act of 1940, they can be offered to individual investors without the burden of high minimums and net worth requirements.

Interval funds span a wide variety of asset classes, including private equity, insurance, credit and real estate. Like all other securitized investments mentioned above, shares of interval funds are not traded, and are designed to seek results that are less correlated to exchanges and based more closely on the behavior of their underlying assets.

Interval funds offer periodic redemptions of their shares back to the fund, based on an overall cap that is calculated annually and/or quarterly. One common formula is the 5% limit, which

caps the total amount of redemptions at 5% of a

company’s outstanding share value per quarter. Redemptions may be subject to a fee.

GROWTH IN INTERVAL FUND LAUNCHES, 2018-2021

Source: Interval Funds Tracker, based on SEC data. (https://www.cioninvestments.com/insights/what-are-interval-funds/? gclid=Cj0KCQiAkMGcBhCSARIsAIW6d0D_nmUfZwWWpyzhfGZKXwh8D6ewY BGF61LwlEgzmpznPWJhFwdFMp8aAgKREALw_wcB)

* Past performance is not indicative of future results.

Interval fund shares have no history of public trading, typically with no intent that the shares will be listed on a public exchange. No secondary market is expected to develop for most interval funds. Limited liquidity is provided to shareholders only through an interval fund’s quarterly repurchase offers, typically limited to a percentage of total net asset value. There is no guarantee that an investor will be able to sell all the shares that the investor desires to sell in the repurchase offer. An interval fund is suitable only for investors who can bear the risks associated with the limited liquidity and should be viewed as a long-term investment. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost, resulting in some loss of the principal amount invested. An interval fund’s investments may be negatively affected by the broad investment environment and capital markets in which the fund invests, including the real estate market, the debt market and/or the equity securities market. The value of a fund’s investments will increase or decrease based on changes in the prices of the investments it holds. There is no guarantee that the investment strategies will work under all market conditions. Investing in lower-rated securities involves special risks in addition to the risks associated with investments in investment grade securities, including a high degree of credit risk. Lower-rated securities may be regarded as predominately speculative with respect to the issuer’s continuing ability to meet principal and interest payments. The use of leverage by an interval fund will magnify the fund’s gains or losses.

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About Us At 1031 Capital Solutions, our mission is to provide tax-efficient strategies for affluent investors across the United States. We provide honest, trustworthy information to our clients. We do what we say we will do. We act with a sense of urgency and purpose. We explore ideas in an effort to find suitable solutions. And most importantly, we work hard to help our clients meet their financial goals.

JASON L. MCMURTRY, MBA MANAGING PARTNER Jason is the founder and Managing Partner of 1031 Capital Solutions, where he blends more than two decades of experience in the investment industry with his real estate expertise to provide customized solutions for investors seeking alternative investment opportunities. Through a consultative and collaborative process, Jason seeks to provide guidance and solutions specifically for investors who want exposure to real estate and real estate-backed investments and other tax strategies.

RICHARD D. GANN, JD MANAGING PARTNER

Rick and Jason have worked together, with few interruptions, for nearly 25 years. Before transitioning to financial services, Rick practiced law for nine years in the fields of real-estate taxation and estate planning. Rick proudly helped numerous clients manage taxes on their real-estate holdings and investments. Rick’s inspiration for helping property owners came from his grandfather, Paul Gann, author of California’s Proposition 13, which lowered property taxes and sparked a nationwide movement of fiscal conservatism.

Important Investor Information

Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommendation to any individual investor. This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. IRC Section 1031 and IRC Section 721 are complex tax concepts; therefore, you should consult your legal or tax professional regarding the specifics of your individual situation. Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically, no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus. Non-traded REITs are not listed on public exchanges but must still be registered with the Securities and Exchange Commission and are required to make regular, periodic regulatory filings. Like exchange-traded REITs, non-traded REITs are subject to returning at least 90% of taxable income to shareholders. Non-traded REITs are illiquid for long periods of time, may have front-end fees as much as 15%, might include unknown types of properties early and the initial property acquisitions might be made through a blind pool. Early redemption of a non-traded REIT can result in high fees that can lower the total return Potential distributions are not guaranteed and may exceed the REIT operating cash flow. The board of directors may decide whether to pay distribution and what amount will be given. When a non-traded REIT is just getting started, its earliest distributions might come entirely from the capital the investors put into it. The value of the investment made into such a REIT could decrease or become worthless at the time the program is liquidated.

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient, and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. An interval fund is a type of closed-end fund with shares that do not trade on the secondary market. Instead, the fund periodically (typically, every 3, 6, or 12 months) offers to buy back a percentage of outstanding shares at net asset value (NAV). Interval funds may invest in alternative assets, carry higher fees, incur default risk, have concentration risk due to a lack of diversification within the fund’s holdings, and may be subject to interest rate risk. Interval funds are highly illiquid compared to other funds and should be considered long-term investments. DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65). Individuals holding a Series 66 do not fall under this definition) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section. The rules and regulations of the QOZ Program are complex, and compliance with the QOZ Program comes with significant challenges such as appreciation unpredictability, certain neighborhoods may be less accommodating to development, illiquidity for up to ten or more years, availability and cost of construction and development financing uncertainty, development and redevelopment real estate risks, as well as a number of Jobs Act interpretation uncertainty which may impact future risks, if any. Oil and gas mineral royalty interests are illiquid investments, are speculative and involves a high degree of risk; investors should be able to bear the complete loss of their investment. In addition, the oil and gas market is affected by many factors, such as general economic conditions, oil and natural gas pricing, financing markets, supply and demand, and other factors that are beyond an Offeror’s control. All these factors could restrict an investor’s ability to sell their mineral/royalty interests. Preferred shares, more commonly referred to as preferred stock , are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders. There are four types of preferred stock - cumulative (guaranteed), non-cumulative, participating and convertible. Preferred stocks are subject to risks such as interest rate risk, no dividend guarantees, call provisions, and liquidation risk.

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