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        Featured Post

          Paul Getty   Dec 02, 2024

        Important Steps to Take When Starting a 1031 Exchange Late in the Year

        Many real estate investors are aware of the two important deadlines that must be observed when completing a 1031 exchange: 1) 45-days after close of esc[...]

        1031 Exchange
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        Recent Posts

        1031 Exchange DST

        What is a Springing LLC?

        By Paul Getty06, Oct 2022

        When the IRS created rules allowing the Delaware Statutory Trust (DST) ownership structure to be used as an acceptable “like-kind” 1031 exchange investment option, they mandated that the sponsor of the DST could not refinance the property or request additional funds from investors during the holding period. DST sponsors were also prohibited from negotiating new leases. 

        If unforeseen circumstances occur that would require additional funds, e.g., loss of a major tenant, DST sponsors were provided with an option to convert the DST structure into a Limited Liability Company structure termed a “Springing LLC.” This LLC structure allows DST sponsors added flexibility to raise additional funds, renegotiate current loans terms, obtain new loans, or enter into new leases. 

        Consequences of a Springing LLC

        The Springing LLC acts as a safety net to provide an additional tool to a DST sponsor to protect investor interests and help avoid a negative outcome. However, when a property is converted from a DST to an LLC structure, investors generally no longer have an option to complete a 1031 exchange unless all the investors in the Springing LLC invest in a new 1031 replacement property. Since this option can be difficult to accomplish, DST sponsors strive to convert the Springing LLC structure back into a DST structure as soon as practical. 

        The Springing LLC not only provides additional options to protect investor interests that are not permitted under the DST structure, but it also provides added security to lenders and can reduce risks of a loan default or foreclosure. 

        It is important to note that since the creation of the 1031 DST structure in 2004, the Springing LLC option has rarely been used. During our firm’s history dating back to 2003, we have only been aware of several situations that required converting a DST into a Springing LLC. However, the existence of this option is analogous to having an insurance policy that is only needed in the event of an unforeseen emergency.  

        To learn more about DSTs and the 1031 exchange process and how it may work with your portfolio, please contact us to schedule a consultation. 

         

        Paul Getty

        Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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        FGG1031 | First Guardian Group and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein.

        1031 Risk Disclosure:

        • There is no guarantee that any strategy will be successful or achieve investment objectives;
        • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
        • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
        • Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
        • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
        • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

        No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results.

        Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.

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