LEGAL INSIGHTS FOR 1031 & 721 EXCHANGES
In recent years, non-traded and perpetual life REITs have emerged as attractive vehicles for real estate investors, especially within the 721 UPREIT DST structure. While these vehicles offer tax-deferred exchange benefits and diversified exposure to real estate, investors must scrutinize several key financial metrics to avoid hidden pitfalls.
The Two-Step 721 Exchange Process 721 EXCHANGE EXIT STRATEGY
The 721 Exchange Transaction - OP Units issued in Exchange for DTS Interests Interests in the DST are contributed, on a tax deferred basis, to the 721 vehicle’s operating partnership in exchange for operating partnership units.
Property Exchanged for Delaware Statutory Trust (DST) Interest
Relinquished Property Sale
Investor sells investment property with the intention of executing a 1031 Exchange.
1031 Exchange funds are used to purchase interests in a DST and held for a period of time.
UNDERSTANDING VALUATION AND MARKUPS Investors should ask whether the REIT has marked up the DST they're investing in and if so, by what percentage. Often, these REITs already own a property and then sell it to the DST at a significantly marked-up price, sometimes exceeding 20%, all while the REIT and financial advisors are assuring investors that there are no minimal fees, a massive misrepresentation. However, a significant markup can indicate an overvalued asset and the presence of hidden fees.
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