KGCI: Real Estate on Air - Unlock Your Real Estate Profits 1031s and DSTs with Jim Whitesides

Episode Date: January 13, 2025

Welcome back to Realty Funnels podcast. I'm Kevin Cahill. And with me today is Jim White Sides, who has an enormously interesting way in which he is able to help real estate agents and real estate buyers and sellers with all sorts of financing and tax avoidance and tax deferral strategies. And I'm excited to jump into that today. Jim, welcome. Thank you very much, Kevin. I'm glad to. to join you and I'm grateful to have a chance to be here. Oh, it's my pleasure. Thank you. So tell everyone a little bit about yourself who you are, what you do, and where you live. Great, great. Glad to. Well, I live in St. Louis, Missouri, about a half an hour south on a nice little lake in Jefferson County. I have my background, many moons ago. I started off, went to the Naval Academy,

graduated, and went to the nuclear program. So I like to say that I'm kind of a reformed engineer, if you will. But while I was in the service, I learned a lot, but I always had an interest in financial markets. And so fortunately, when I got out of the service, I was able to build on my energy background and get started in the energy commodities realm, which was natural gas, crude oil, refined products, that sort of thing. So I worked for a couple of banks managing their client price risk and also.

through a couple of my clients. I worked for them directly and came here to St. Louis to start the electricity trading floor for Amerin. That's the local utility here in St. Louis. Had a lot of fun. It was a fun time. The energy markets have been, we're in a lot of transition through the 90s

and early parts of this century. And then after the turn of the century, when there were certain things that occurred, the Enron would kind of meltdown, and certain energy problems in Texas and California caused some changes to be made in the way that the energy markets were structured. So my career took a turn. And so I needed to find a new home for my time and my career with three little ones at home. And it was recommended to me that I'd try my interest level in the self-storage market.

And so that's what I did. And I started very humbly with one facility. It grew over time to a number of storage facilities here, boat and RV storage and conventional storage here in the St. Louis area. I was the past president of the Missouri Association. I was on the Illinois Board, the National Board. And when I sold that property, that business in 2017, my intention was to do a 1031 exchange into other types of rental properties, right?

So I'd have more time to spend with my kids before they trotted off the college, maybe build on what I knew, learn some new things. And I did a 1031 exchange into a couple of properties that met my criteria. But as anyone can tell you that's done in 1031, the first one is kind of a learning curve. So, yes, I was into my 30-day period, and it only put to work about 25% of what I know. needed to put to work. And so I was fortunate to learn about DSTs or Delaware statutory trusts. And that's an instrument, a financial instrument that invests in commercial real estate. And those who purchase shares of the DST are purchasing actual fractional ownership in the

real estate that the trust owns. And so because of that fractional ownership of actual real estate, DSTs are 1031 eligible. So that was a very good learning experience for me. It fit my situation perfectly. I was able to complete my 1031 exchange with the DSTs. And over the next period of time, I learned that I found rather that the DSTs were really for my point in my life better than better for me than my buildings. So I sold my buildings. I went back to the broker dealer that I bought my securities through and said, hey, I know a lot of people in this realm. I think there are a lot of commercial real estate owners and business owners who could benefit from learning all their options when they do a 1031 exchange.

And so that's what I do now. In addition to being a commercial realtor, a commercial broker, I am a licensed securities broker as well. And so I help investors, I help agents in commercial and residential real estate from all over the country to inform their clients, all their options. And in so doing, I'm able to help realtors and commercial agents bring in more business, close more business more quickly, and be seen by me being a resource to them, they're seen as more of a resource to their clients. So whether they need debt or they need equity, or they need a tax deferral situation

or advice, those are all things that we bring to the table. That's really fascinating. So you had this nuclear submarine history, which you then parlayed into the energy financial markets. And then from the energy financial markets, you found this niche of the commercial real estate space, which is the storage buildings. And then you got really involved with the storage buildings, really understood that industry inside and out. and got really actively involved with that. And then as a natural progression through the commercial ownership process,

you were looking for an exit strategy that was really a tax beneficial approach rather than having to pay Uncle Sam a big huge chunk of any capital gain that you enjoyed. Well put. Yes, very well put. And, you know, I really, that's exactly right. I felt like I learned so much through my personal experience that it became clear that others must be looking for the same sorts of solutions. And I think that, frankly, I think that my story does resonate to a large degree with business owners who think about selling or commercial property owners who don't feel like they want to rush into replacing the property they're selling with another property that really might not be much different than them they're selling.

or what have you. And so, yeah, I feel like I was fortunate that I was kind of educated by those who had good solutions for me. And it's a little bit of a pay it forward sort of situation too. And others are usually pretty grateful what we can help them with. Well, and the Delaware statutory trusts are a strategy that most people don't even realize exist. They think that they're going to have to sell commercial asset, number one,

and then take that capital gain and reinvest in commercial asset number two. And they're like, well, I'm selling because I don't want the headaches or the hourly investment of my time. I'm looking for something far more passive, but most 1031s are going to be, because they're like kind exchanges, you're going to be selling a commercial asset and buying a commercial asset. How are you going to find one that is not going to. to be labor and time and headache prone. And the Delaware statutory trusts are an amazing option for a lot of people who are looking to make a cleaner exit, you know, have their money still working for them, take advantage of those tax avoidance strategies. Tell us a little bit more

about those Delaware statutory trusts. Yeah, you described it very well. I think that I, a common, if there's the commonality between investors oftentimes is someone who is actively involved in a business or actively involved in managing the real estate that they own, and they would like to shift to a more passive involvement for any one of a number of reasons. But they would like to have exposure to the real estate. Like you said, they want to participate. there might be certain sectors that they find really attractive or what have you, but they don't want the day-to-day. So a DST does that.

They are, there are DSTs for virtually any sector, whether it's student housing or warehouses or multifamily or single-family rentals. You name it. There's our DSTs for it. But usually there are a number of properties within the trust. The trust is formed just for the purpose of owning the real estate. And there are typically a number of properties in that trust. There could be just one, but there could be many. And so for an investor with X amount of dollars,

they have more diversification, certainly, by having their real estate dollars invested in a trust that may have, say, 10 properties in it. And they can also split those dollars into multiple DSTs. So instead of, like in my case, I had the majority of my investable wealth in self-storage. which was fine, but it was very concentrated. So then I split it up, and I'm in half a dozen different sectors,

much different geographies. The debt that is on those properties is non-recourse to the investor. So whereas I owed a lot of money, I have my business, now with the DSTs, I'm limited to the limit of my liability is just the capital that I put into it. This non-recourse debt, it's much more diversified. and you don't lose the ability to do it again. One question I often get is,

what's the difference between a DST, which to your point is often not well understood, what they are, but that's not a lot uncommon. It's a very large market, very large sector of the real estate market, but it is not commonly understood or known well. But what's the difference between a DST and a REIT, or a real estate investment trust? And there are a couple key differences.

is a DST is a security, but it's a private placement security, meaning it's not traded on an exchange. It is sold through a broker-dealer. So it has to be, you know, it isn't purchased directly from the property owner, but it's purchased through a broker-dealer. So that means it's properly registered. There's all sorts of vetting of both the trust itself, but then also those investors who can invest into the trust. Exactly correct. And that's, you're exactly right. That's the whole reason why they have to be sold through a broker dealer so that regulators can be assured that there's, there are proper disclosures, that there is a track record, that the proper filings are made. And so while it's not an exchange traded item, it is more, probably more vetted than something that, than a public company, because the SEC really bends over backwards to make sure, that investors are fully informed and they're well represented and someone is looking out for their best interest. So, but so the difference between a REIT and a DST, DST is formed to own

real estate, certain parcels of real estate. And when an investor purchases a DST, whereas when, let me back up a second. So if someone were to buy stock, you'd call your Schwab broker and you would buy 100 shares of GM. And that represents, your purchase represents a fractional ownership in the company, general owners, right? But when you buy DST, you're buying shares or a fractional ownership in the actual real estate that the trust owns. And so that's what makes it 1031 eligible.

And that's a distinction. That's one of the distinctions between DST and a REIT. With a REIT, you're buying shares of that company. Right. You're not actually buying a share of the physical real estate that is owned. And so there are other differences too, but that's one of the key ones that draws a distinction between REITs and DSTs. And for those who have done a 1031 exchange before, you know that the 1031 is done

through a qualified intermediary. So your relinquished property, those funds go to the QI, and they are held there until you identify the replacement property. It's the same way with a DST, except you don't identify a property. You have identified the DST as your replacement. And so practically speaking, the exchange works exactly the same way. It's just instead of the replacement being, you know, Walgreens at the corner of Maine and whatever, it's X, Y, Z, DST that is your replacement property.

And from a real estate broker point of view, and you're a commercial. broker, and I've done some commercial deals, though I've spent most of my career as a residential transaction agent, you don't have to deal with the headache of inspecting a property, checking it for environmental compliance. You don't need to worry about the electrical. You don't need to worry about transferring utilities. You don't need to worry about deposits from tenants. All you're doing is identifying a DST. And so that process, of the 1031 exchange is both faster and less expensive, I would imagine. I mean, you're just not incurring any of those expenses.

You're exactly right. You couldn't be more right. When you're looking to replace that another property you sold, you have to look for properties. You have to go through the due diligence process. You may make offers. They may be accepted. They may not. You have to change over the utilities.

You have to decide if you're, we're going to be managing that property or a third party, you have to put the debt in place. All those things take time and money. And you're right. With the DST, you select the DST, the properties have been purchased, the debt is in place, the management companies, you know, is all in place. Everything about all the due diligence has been done. The SEC due diligence have been done.

The broker-dealer due diligence has been done. So none of that is necessary. And so the investor really can gain a lot of comfort in that. And in a lot of ways, not only is it cheaper, but it could be argued that it's a little less risky too, because let's face it, putting one's money in one property versus putting one's property in a DST that may have 10 or 20, one is much more diversified, may even have access to the types of properties that you and I would not have access to individually. Yeah, imagine that you could own through a DST, a fractional ownership in a massive

office building. You and I might not ever have the capital to buy the entire office building ourselves or even get the financing to buy and control that office building and then enjoy all the benefits of an office building or of a medical campus or of a storage facility or of massive of student housing options, and yet through the DST, you really could. So then the seller of that asset needs to find a broker-dealer like you in order to then go through the process of understanding their options, what type of DSTs are currently available. They're not always all-taking money.

So I guess what you might say subscribed. And so you're looking for a DST that is open. for new investors and a broker-dealer like you is able to help that type of seller or that real estate agent who is helping a seller of a commercial property with a 1031 intent. That's true. The value we add is to help of those issuers that have are offering DSTs, we can help you evaluate the track record. There may be some aspect of or the strategy of that DSTs.

that resonates with an investor or may not. And so that's what a broker dealer like myself would be in a position to do. That's what we would, the value we would add. And also, like you said, they are always all available. A DST may be looking to raise $50 million. When that DST has raised it, then it closes. And there may be a follow on, but we need to be aware of that. And, you know, you mentioned a good point, too, about assisting.

the realtors, whether it's a commercial agent or a residential agent, most of the time, or much of the time, even a residential client may very well have interests in commercial real estate that a residential agent just isn't necessarily aware of and may have interest in real estate along with either siblings or other family members or what. have you. And so being able to address those things is a way for a residential agent to expand the scope of their offerings with a client and also look for additional revenue streams. I mean, we're all looking for additional revenue streams, right? Absolutely. I love that you have these multiple revenue streams. You're a commercial real estate agent. You have a lot of experience in that

warehouse, I'm sorry, storage unit space. And so you bring on, enormous amount of value to your clients who are in the storage space community. And yet you also are able to help real estate agents who have a commercial need, who have clients who have a 1031 need. You bring a lot to the table for your own clients, but then also for other real estate agents who might not realize that the lovely couple that they're sitting with at the dining room table to sell their, three-bedroom, two and a half bath home, 2,400 square foot home. The wife and her three siblings

just inherited the father's apartment buildings. And they're wondering what to do. And if you're a residential real estate agent, and you know that you can refer these type of opportunities to a commercial real estate agent, or talk with that potential seller, who just inherited an apartment building and talk about how there are different approaches that might be available to them. And then you also have people who, you know, they've owned the family bakery for generations. And now they're looking to sell the bakery and sell the real estate that goes with the bakery. But boy, they've been holding on to that bakery because that tax bill is going to be a real

doozy when it comes to an actual closed transaction. These are all things that you can help people with. You're exactly right. There are a strategy that the example you offered is a good one where the person you're talking to is selling a house. They may be one of three siblings who inherited a property and now they collectively have to make a decision. Or if structured properly, maybe they can make their share of a decision separately. But those are things we can help talk them through to make sure that if they're, They want to make their tax deferral decisions together.

Great. If there's a way that they can maybe grow their own ways after selling that property and not have to jointly make them, then we can assist them with that. And also the family bakery may have a real estate component, but it also may have gains that are not real estate related. So there are alternative investments. We'll refer to DSTs as kind of in the alternative investment space. but there are also tax deferral strategies for the non-real estate portion.

So the gains that may be classified as goodwill or that are not squarely in the, that qualify for 1031 treatment, we may have options for that as well. So being able to save someone, to use your example, a lot of tax money and be able to bring some resources to bear at a time when they're probably under some stress, maybe it's a forced sale or maybe it's a death in the family, what have you, or maybe it's not. Maybe they just, they know someone, whether it's a family member or a friend who's selling something and they've expressed some concern about the taxes that they're going to have to pay when they sell. There are a lot of reasons why it's a good idea to reach out and just to find out what your options are. I think it's fascinating that there are so many different ways in which people can

avoid the big reasons why they're not selling real estate. They think, oh, I'm not going to sell right now because when we bought our home, interest rates were 3%. And so we've been enjoying a 3% interest rate for the last seven years. And boy, if I wanted to buy the next home now, I'm going to have to deal with 7% interest rates. So we're going to just stay cramped in this neighborhood, where we've outgrown the home, and where we're not really enjoying life to its fullest. Why? Because of this interest rate. But the reality of it is, in your creative financing network, there are people who can help with those types of scenarios as well. You're exactly right. There are strategies for taking advantage of below market interest rates that

may exist or any other really what it comes down to is just whatever is a sticking point in the process which keeps someone from transacting or keeps them from kind of following the path that they want to be on and they feel stuck there are often lesser known alternatives there are lesser known strategies but there are always almost always workarounds and I think that the thing if I would like to convey a couple of different things in this conversation, one of which is there are options. It's good to ask what options there are and not assume that there's no way to work around obstacles. And the second thing is we can bring those expertise, those people, that expertise to bear and have a conversation with them to see if things, the options that

exist really fit their situation. Sometimes they don't. But at least if they explore and find it out what all their options are, whatever decision they make, they're making it more confidently. And that's one of the things that I've known over all these years, being a broker since 1999, a lot of times people just need a better sense of what they're facing. They know that they don't know what they should know. And when they can have a resource like you or like me and ask some questions, get some answers, it gives them breathing room, gives them some margin to then say, you know what, knowing what we now know, these are our options.

And so I think it's very valuable that you bring all of this to real estate agents who are looking for smarter systems and strategies. They know that inventory is at a record low amount. Why? Because people are locked in with those low interest rates and they don't want to budge. and yet they're really not happy in their current home. They can't do what they want to do with it. It doesn't make sense for them to expand that house.

It doesn't make sense for them to over-improve it for the neighborhood. And so they're living not their best life simply because they're not asking people for some additional information that could help them round out their thinking. So I really think it's valuable for real estate agents to have resources like you. I always just want to be an additional resource. Let me be just another opinion that you can listen to, another tool in your toolbox. So I'm always happy to be a resource. I think it's really generous that you're happy to be a resource to fellow real estate agents

and to home sellers, home buyers, commercial investors, people who have those questions about how do we make this next step the most tax advantaged approach to the, transition that we're trying to make. Right. And you said that and it's true. You are very generous with your time, Kevin. I'll give you a plug. You're very generous with your time and what you know.

And you're a good example, you know, for all of us who are sincerely, you know, you're sincerely interested in helping people and it comes across. So I'll give you that unsolicited plug from me. Well, thank you, Jim. I appreciate it. It's just a pleasure to know you. And it's really great. I'm so excited that.

this is a new series of opportunities for commercial people. Commercial real estate agents across the country can reach out to you. Commercial agents can pick your brain when it comes to their clients and their particular scenarios and what they're trying to accomplish. Because really, with your network, with your reach and entire scope of knowledge, you're able to help people all over the country, not just St. Louis by any stretch. You're able to help them from coast to coast. Right. And to that, I would add that someone who thinks that they might benefit from learning more about this, you don't have to know a lot about it. All you really have to know is or recognize is if someone has a commercial real estate need that might relate to taxes or 1031 exchanges, or maybe they need to

raise equity or debt or they have a strategy that they're hoping to find with regard to their residential home. Any of those things are things that we would welcome a call regarding so we can help with all of you both. I think it's important. I'm so glad, so thankful that you're able to join us today on the Realty Funnels podcast. I think this has been really eye-opening for a lot of our listeners because they're just learning about these options that they used to previously think were just the 1031, but now they've got the Delaware Statutory Trust. They've got creative financial options that are available to them as well. So I'm very glad that we're able to share this information with all these listeners and viewers today. Jim, thank you so much for

being with me today. Thank you, Kevin. My pleasure.