Origin Exchange - 1031 Exchanges w/ Origin Investments - Real Estate Investment Opportunities Series

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Welcome to a White Coat Investor Real estate webinar. I'm here with Michael o', Shea, the vice president of Origin Exchange. He's going to be talking to us today about Origin Exchange, which is kind of a new feature they have at Origin. If you've been with us for a while, you know about Origin and their great funds and some of the awesome things they've done over the years in real estate. But this is kind of a new thing. And the whole point of this webinar is to introduce Origin Exchange and the opportunities that are available through it for those of you who may be in need of a product just like this. Michael, welcome to the webinar. Thanks so much for your preparation. And let's go ahead and turn the time over to you for your presentation.

Great. Thank you, Jim. Really appreciate that warm introduction. And yeah, I think this is a new, exciting initiative that we're doing over here at Origin. And you see the title here is Origin Exchange. We're facilitating a turnkey 1031 exchange solution for our investor base that has appreciated real estate and wants to get out of active management and pay as little taxes as possible. So I think that's what we do here. And I'll give a little background about maybe the genesis of this entity or this platform. Origin has become one of the top sponsors in the market for tax advantage real estate through the use of Opportunity Zone funds. And we had continuing demand from our investor base that was saying we have a property that's appreciated in value. Do you offer something in the 1031 exchange world? The 1031 exchange world for sponsors like us? When we looked at it and thought about putting a product in the marketplace is very high fee, very transactional in nature and didn't really align what we were doing at Origin. So it took a little bit of time to really research the market and say, we have so much investor demand. How can we do this better? How can we have better alignment of interest and better investor outcomes? And so we've really been working hard behind the scenes for the last six to eight months, working with outside counsel, looking at different product structures and frankly building a better mousetrap. And we are ready to launch in the first week of August. We'll have our first product available for clients to 1031 EXCHANGE INTO. And we think it's going to lead to better investor outcomes. So we're going to talk a little bit about that today real quickly. From just a compliance perspective, this presentation is meant to be educational in nature. Obviously, if you have a specific 1031 exchange. We'd love to talk directly with you. You can reach out directly to me, we'll have my booking link available. You can find time or you can just email me directly. But in order to make an investment, you need to receive the full offering memorandum, which has all the risks involved in it before you make any sort of investment decision. So this is me. I've been doing 1031 exchanges in the securitized world for almost two decades. So I've come across a lot of cases, helped a lot of investors facilitate a 1031 exchange. And as Origin was getting ready to launch this platform, it felt like something where we had the chassis to do it right. We launched Sidecars, we're buying properties. This is something that we're essentially built to do. And I came over here with the specific initiative of leading this platform. And so as I mentioned before, if you do have any specific questions, feel free to reach out directly to me. My email address is just my first name, my first initial last name with no apostrophe M O S H E A at Origin Investments. And I'll have that at the end of the presentation as well. So Jim mentioned a little bit about Origin. I think there's a lot of people that have followed us. We have a lot of investors in this particular group. If you're not familiar with Origin, just give you a quick background. This is a company that to me is very interesting because of how we were founded. Our two principals, Michael Episcope and David Shear, they built their wealth in a different business altogether. They were trading derivatives essentially, and Michael specifically was named a top 100 trader in the world twice. And so they built significant wealth and had a lot of similar thought processes about how to invest it, how to grow their own capital, how to protect their own capital and have good alignment of interest. And what they found in the marketplace was that they couldn't find any deals, any sponsors that they really liked. And so they formed Origin to invest their own wealth and friends and family started coming along. The results were fantastic, frankly, because of the way that they think, coming from a derivatives background, thinking about risk a little bit differently, the returns were there. And so Fast forward now 17 years. We've now got over 4,000 individual investors and we partner with over 80 registered investment advisor firms across the country that invest their clients capital with Origin. We're a very data driven firm. You may have heard about the Multi Lytics platform that we use, which is a machine learning model that we started using before Generative AI was on the discussion at every single conversation. And it's a tool that helps us know or know better where rents are going to grow faster. And you can see the markets that we've identified. Our headquarters is in Chicago. We don't buy any assets there. And that's deliberate. We have four offices, Denver, Dallas, Charlotte and Nashville, where we have deal officers that are focused on those markets. Florida, Texas, Front Range of Colorado, Phoenix, Las Vegas, Atlanta, Charlotte, Nashville. And we only focus on multifamily assets. So there's not a single deal when it comes to our market, frankly, that we don't see. So that's a little bit about origin. But today we're going to be talking specifically about the 1031 exchange solution. And to me, this is one that's a fairly interesting topic because when we talk about investment, it's almost always tied to numbers. It is, what is the risk that I'm taking for this? How long is my investment period going to be, what is my expected return? And all of those are very, very important. And we'll talk about those with origin exchange as well. But you see here, obviously we want to simplify your life. So there's a lot of our investor base that has owned real estate throughout their career. And the real estate has gone up in value, they've amassed larger portfolios, they've started to pay down the debt. And as you move further and further along your investment life cycle, from the growth phase and accumulation phase into the preservation of capital stage, your priorities tend to shift. And people are happy that the value of the real estate has gone up. It's been a great investment for them, it's kicked off a lot of cash flow. But there's the three T's in real estate, toilets, tenants, trash. Even if you have property managers that are running these properties for you, almost every time your phone rings, it's bad news. The property taxes went up, something broke, somebody quit, the tenant didn't pay rent. And so this is a way to simplify your life, clean up your estate, roll the proceeds from your appreciated real estate tax free into high quality institutional real estate, all while paying lower fees. So the idea here is to exchange up into higher quality real estate and exchange out of the day to day management. And just one quick story I mentioned, I've been doing this for many years. I remember working with a family out here in a suburb of Chicago where, you know, when I sat down, they had inherited a fourplex and it was a property that her father had managed and had passed away. And she Inherited it on his behalf. She had no idea how to run this property. And so part of my normal discovery when we're doing a potential 1031 is how much is the property worth? What are you paying in fees, like in taxes? How much are you actually cash flowing from this property? Because we want to see if an exchange would increase your income or what have you. During the discovery process of just simple kind of question and answers, you know, she started, like, tearing up, and she knew she wasn't running this property. Well, she felt like she was letting her dad down, and frankly, she wasn't cash flowing at all. It turned out that the rent that she was collecting, which was far below market because she didn't want to raise rent on the tenants she become friends with, and her expenses were way too high. And so we took this asset, which was about $750,000, and not only did we roll it into a 1031 exchange, call it at 5% cash flow, right? So now we're earning $30,000 a year. But we totally eliminated this burden from her life. And just as we went through this process, I remember her coming over across the table and just giving me a hug and saying, thank you. This is such a help to my family that now this is a relief off of our plate. So it's something that improves investor outcomes, increases cash flow, pays no taxes, and then in many, many cases, can simplify your life and move you from active real estate to passive. All right, so a lot of this is educational. What we're going to be talking about today, in order to do a 1031, you really have to understand some tax law. And so we'll talk through that again. If you have a specific case, you know, how your property's held, how your property is taxed in a different state, you know, feel free to reach out directly and we can talk about your sale. But when we say 1031 and later in the presentation, we'll say 721, we're talking about section 1031 of the tax code and section 721 of the tax code. So section 1031 essentially says no gain or loss will be recognized on a property if the proceeds from the sale of that property are exchanged for, like, kind real estate. What does that mean? We'll talk about that in a second. But essentially, when you sell real estate in exchange for, like, kind real estate, it's not seen as a sale and a new purchase. It's seen as an exchange of assets. Your cost basis rolls over, and therefore no taxable event has happened. And so a 1031 is just 100% tax deferral that you can continue to do for the rest of your life and never pay taxes on the sale of that real estate. And what are those taxes look like? Well, greatly depends on the state that you're in. I think there's a lot of people that when you sell real estate, you say, well, my gain is this. And the capital gains rate is 20% or 15% depending on your tax bracket. And that's going to be my total tax liability. There's a lot of other taxes out there, depending on your state, depending on your income level. So this is just a quick outline. Let's just take an example of a property where we bought it for $600,000. So that would be our cost basis. Over time, we've depreciated that asset. Depreciation is one of the major benefits of owning real estate, which allows you to offset your current income tax. And so in this example, our adjusted cost basis would be 400,000. So 600 minus 2 and then we're selling it for 1.2 million. So you have the capital gains tax on the $600,000 of gain, that's a 20%. But a lot of people don't realize you have to recapture the depreciation. It's actually a higher tax rate, 25% of the 200,000 that you've accumulated on that asset. State taxes would be all the way down from 400, your adjusted basis, to 1.2 million. In California, the state tax is 13.3. But across the country you're averaging about 6.1% state tax as well. And then if you are subject to net investment income tax, that's another 3.8% on the full gain. So here in this example, 5 for 6 sell for 1.2. A lot of people think my total tax liability would be 120,000. It's actually closer to 307,000. So a very, very significant tax liability. And remember, the power of the 1031 exchange is that it's a deferral of everything. It's a deferral of federal, state, local and net investment income tax. So that full 1.2 million would now be able to be rolled into a new property. So to help you out with this, we actually have a tax calculator on our website. And what I like about this is you put in your inputs, what'd you buy for any capital expenditures, how much have you depreciated, any closing costs? And what state do you Live in and we'll just kind of kick out this estimated tax savings. Well, what's really nice is if you kind of scroll down to the bottom, there will be a button that says email me a copy of this. And this is a QR code. You can actually take out your phone and scan this. It'll take you directly to our calculator. You can actually click directly on this as well on your left on your PC and that will take you right to the website. The email this to me is going to give you a summary, all of your inputs, your adjusted cost basis, your total depreciation, and it's going to print out a single one page PDF that gets emailed directly to you. Because as you go through your 1031 exchange journey, you're going to get continue, people are going to continue to ask you those same questions over and over. So you can keep it in your 1031 folder. And it's just a nice tool to have so you can always reference it. All right, so let's get into some of the rules of the road. Section 1031 has been around for over 100 years as tax law started in 1921 as the starker case. So you sometimes will hear this as a starker exchange. And because it's been on the tax code for so long, there's been a lot of changes to it to make it a little bit more strict and a little bit more stringent. So you really have to follow these rules very, very precisely. And if you don't, you could Potentially blow your 1031 exchange and be subject to taxation. So this is the most common one that comes up. You know, people say 1031, they go, oh yeah, you have 180 days to do an exchange. So that is totally correct. So think about day zero here. Day 45, day 180, this is your timeframe. Day zero is just when you sell your property. Now remember, there's two closings in a 1031. So just to keep things simple, we call the property that you sold your relinquished property and we call the property that you're gonna buy your replacement property. So once you sell on your relinquished property, the clock starts ticking. And yes, you have 180 days to complete your exchange. But a lot of people Forget you have 45 days to identify a replacement property. What does that mean? It just means that you identify 123 Main street and you can identify up to three of those. After your 45 day window is up, you can only close on what you've identified in that 45 day window. So when people say you have 108 days, you do, but it's really that 45 days that makes it really, really difficult. So tough thing to do on your own because it's a very short time frame in commercial real estate. All right, so let's talk about some of the other sort of rules of the road here. I mentioned previously that when you do a 1031 exchange, it has to be one property sold for like kind in another property. That doesn't mean if you sell a hotel, you have to roll it into a hotel or apartment for apartment. It simply means real property held for investment purposes exchanged for the same. So the definition of this is actually very open. And this is one of the best parts. About 1031 exchange is a little less strict. So you can sell multifamily and you could roll it into vacant land, you could sell a Delaware statutory trust interest and you could roll it into timberland, as long as it's real property that's held for investment purposes. So think about maybe what doesn't count. That's probably a little bit easier than financially. So your primary residence that you live in wouldn't count. Of course, you get an exemption on that anyway. The section 121 exemption, people ask about vacation homes quite often. If I'm renting out a vacation home but also using it, there's very specific rules for that. Simple answer is if you're using it less than two weeks out of the year and actually renting it more than two weeks out of the year, then that will qualify as investment property. But importantly, the Tax Cuts and Jobs act strip some things out of the 1031. You used to be able to 1031 exchange inventory personal property as part of your business. You no longer can do that. So if you own REIT shares personal property and you have a capital gain from that, it will not qualify for section 1031. However, as I alluded to earlier, the Qualified Opportunity Zone Fund is now there. So Origin actually is one of the larger OZ sponsors out there. And if you do have, you know, appreciated stock position selling a business, the Opportunity Zone Fund might make sense for you. But those would no longer qualify for section 1031 treatment. Okay. Another big one is the use of a qualified intermediary. Essentially what the rules of a 1031 stipulate is that you can never take possession of the proceeds. And so think about the qualified intermediary as sort of an escrow agent. And we can certainly point you to a highly qualified qualified intermediary if you're going through this process, but you want to get this qualified intermediary set up before you sell your property. So think about that day zero timeline. You want to call the qualified intermediary, get that account set up before you close on your property. When you actually do go to close, the cash will go directly to the qualified intermediary held on your behalf. You have 45 days to identify a replacement property. You're going to identify that property with the qualified intermediary. They can also help with legal and structuring and some of the other, you know, facets to a 1031 exchange. This is a very, very important part of it. And then when you want to roll the proceeds into your replacement property, the qualified intermediary will actually just send a wire and fund that second property. It's kind of a triangle. It goes to them and it goes to the new property. And you never touch the money. If you do, if you have a closing and the money goes into your bank account, you can no longer do a 1031 exchange. So that's very important. Entities come up quite often. It's obviously very common to hold real estate and LLCs and partnerships. One of the things that you have to Remember on a 1031 exchange is that you have the same taxpayer rule of continuity of title. So if you own the property, ABC llc, the replacement property has to be purchased by ABC llc. And we get questions quite often where somebody will say, I'm member A, members B and C would not like to do a 1031 exchange. Do we have any solutions there? And of course there is. There's something called a drop and swap where you can roll into tenant common interests. You can actually buy out members B and C and then you could be the controlling member of ABC llc. But really our solution kind of works where we. What we do at origin is a 721 upreach, which I'll explain later, where ABC LLC would eventually own an interest in our broader real estate fund. At that point, you could retitle it and members B and C could actually sell out. So this is one where you sort of have to get involved. You have to know the case details. So if you do have this kind of situation, feel free to shoot me an email and we can set up a call to discuss your particular situation. These are the six rules. So the last three all kind of rhyme with each other. Replace mortgage debt, purchase price matters, and then you must roll over 100% of the equity. So keeping it simple, whatever you sold the real estate for you have to replace that full value of real estate. And you can never take any cash from the sale. You don't do those two things, you're going to have a tax liability. So let's just walk through a couple examples. So on the left hand side, we have what you're doing. You're selling a building for $1 million. Your leverage on the property is 40%. And so you've got 600,000 of equity in the building and a $400,000 mortgage to pay off. So now you've got 600k in your pocket. Let's just say, for example, you find a replacement property worth 1.25 million and you go to the bank and they say, sure, we'll loan against that at 60%, so we'll give you a loan of 750k. So kind of do the math and say, all right, well, I only need to put in 500. So now you've put in 500, you've replaced more than what you sold, which is great, can always go up in value, but you've put $100,000 of cash from the sale in your pocket. That $100,000 would be taxed as cash food. So you want to make sure that you put all of the cash from the sale into the exchange. The second problem you can have. So, same example on the left hand side of what you're selling, you take the $600,000 and you find a great property doesn't need any leverage. You could take the whole thing down with your equity check. And so you roll all 600,000 into the deal. But now you can see you've gone from a million dollars of real estate value down to $600,000 of real estate value. So even though you've rolled every penny of equity from your sale, this is actually going to be taxable forgiveness of debt, or what we call mortgage boot. So how do we solve these problems? Right, it's very difficult in 45 days to find something that's the same price where I can roll over all my equity. And there's kind of two ways to fix this. So kind of sticking with that same example, you've got 600,000, you need to replace a million. Well, the most obvious answer is you had debt before, just use debt again. So as long as you have the same or equal amount of debt on your replacement property, you should have no problem. So here's a simple example. You roll overall 600,000 into a property with 55% leverage, right? A little bit more than what you had. So you take on a new mortgage of 733, you've bought property of 1.33 million and you've got no cash in your pocket. You've gone up in value on the real estate. So this would be a tax free exchange for you. The second solution if you don't want to have a mortgage, is to add cash so you can replace debt with cash. You can't replace cash with debt. As we showed in the first example, you can't pull up cash and put more debt on the property. You can get rid of debt and add cash if you have the cash. So this is an example, you have 600 from the sale, you roll it in, you add another 400,000 from a separate account and you buy $1 million piece of property. So you can add leverage or you can add cash to have a fully tax deferred exchange. All right, so we've talked about all of the rules of a 1031 exchange. So if you're selling a 2 flat, if you're selling the business, the building that your business practices out of, if you're selling some raw land, it's very, very difficult if you're not in the commercial real estate world every single day to identify a property that is going to be the same value that you can roll over all the cash that you like that you want to own in a 45 day window. Frankly, for a lot of our investors, they kind of say, well, what's the point? Because even if I do overcome all of those obstacles and I sell my property and I do my own 1031 exchange and I find a new property, I'm essentially just exchanging one headache for a new headache. So I would rather just keep the current headache. What we syndicated origin is something called the Delaware statutory trust. And you notice that from the light kind exchange slide that we were on a few slides ago, in order to qualify for like kind, it has to be a very specific legal structure. So there's two securitized structures that will actually work for a 1031. One is a TIC tenant in common. When I say securitized, I just mean we can pool investors capital together to buy an institutional property. Tenant in common has many challenges to it. It's very, very difficult to do. And then the other one is a Delaware statutory trust. Delaware statutory trust is a passive investment. There's a full revenue ruling on it 2004-86 that says an interest in a DST will qualify as like kind of for the purposes of a 1031 exchange, we can take up to 2000 investors in this type of structure. So we can buy some significant assets and have pretty low minimums for investors to come in. So the concept is, let's just say here's just some properties in our current portfolio, the Origin Income Plus Fund. So these are actually not DSTs that we're currently offering. But just to kind of paint a picture of the scope and quality, just say, let's take one of our target markets, for example, Dallas, and let's say we, we went out and bought a $100 million apartment complex in Dallas, Texas, and you sold some raw land for a million dollars. Well, you could take that million dollars and roll it into this property in Dallas. And now you own 1% of this institutional quality property. And we send you a check every single month and we manage the asset. So you're exchanging up into institutional quality property and then you're exchanging out of the day to day management through this ownership of the dst. As I mentioned, when we first got started on the intro slide, as we were sort of doing the research on the DST market and trying to create a better mousetrap for our investors, it was surprising to actually go through their legal documents and find out how egregious and how high some of these fees actually are. And I think it's okay to have fees if they're kind of declared and open. The problem that I found with the DST market is that most investors are totally unaware that they're paying any of these fees. And so if you kind of look into a typical DST that you would just find online today, and you find a broker and say, oh, here's a DST you can invest into. You're typically going to be paying 5 to 6% upfront in a commission to that investor. The sponsor is going to be getting a dealer manager fee, the broker's going to be getting a managing broker dealer fee. There's a finance coordination fee for putting the deal together. So when you take all of these sort of hidden fees up, it can equal up to 15 to 20% of your investment is gone in fees right off the bat. So if you put $100,000 into a DSP, 85,000 buys real estate, 15,000 buys fees. Well, that's essentially your net asset value. You're starting at 85 cents on the dollar. So that property's got to appreciate 15, 16% just to get back to what you paid for the investment. So that is something that we didn't want to just lower the Fees, we think it's egregious and we've gotten rid of all of them. You can do investments directly with origin. We don't have a commission structure, we don't work with brokers, we don't pay commissions, we don't pay a managing broker, dealer fee, no finance coordination fee, etc. So we've lowered that front end load from 15 to 20% down to 2%. And so this is an institutionally priced investment. And what we think that means is anytime you look at two investments, all things being equal, the one with the lower fees is going to outperform. And so we think it's going to lead to a better investor outcomes over the very long term. So you can kind of look at the DST market range. You can see there's significant difference between some of the firms out there in terms of their acquisition fee and offering expenses and commissions, et cetera. But we've kind of cleaned it up and made it very simple. We have a 1% acquisition fee currently on our DST that's in the marketplace. Other than that, we get reimbursed for O and O stands for organizational and offering expenses. That would be outside legal counsel. Some of the fees that it costs us to be on the road and raise capital for the fund, and that's about 50 basis points. So a very, very low front end fee, which means 97 cents of every dollar is going into buying real estate in an origin DST. So that's kind of how DSTs are typically structured. Now the typical exit strategy for a DST for many years has been, I'm going to own this hundred million dollar apartment in Dallas or whatever it is. I'm going to own that for five years, seven years, and then we're eventually going to sell it. We're going to sell it to a third party buyer. In that case, I would get my principal back plus any appreciation and then I would just roll it into the next esc. And I would roll it into the next esc. So from an estate plan perspective, it's kind of known as swap until you drop. So people will just continue to do that forever. And we'll talk about this in a second. But every time we swap, there's additional fees that have to be paid. And not only that, you have operational risk, right? There's when a DST goes full cycle, you say, oh great, the Dallas property that I invested in has sold. Now let's roll it again. You have 45 days to roll the DST into something new. Sometimes there's no equity available. Sometimes the equity available, you don't like that property, sometimes the cash flow is too low. So from my experience, a very significant amount of 1031 exchanges that are done are done so begrudgingly because that clock is ticking. So the swap till you drop is very operationally intensive with a lot of fees. So there's a different part of the tax code called section721. And you see it, you see it here, it's a contribution of real property to a partnership is tax Deferred under section 721. So it single stage. If you owned a $50 million apartment building, say Sam Zell's company here in Chicago, Equity Residential, publicly traded REIT that owns multifamily assets, perhaps you could sell your $50 million apartment building to Equity Residential. They would give you partnership interest and now you'd be diversified across their whole platform. At origin there's we, we have gotten a lot of requests from investors that have said something very similar. Is there a way that I can sell my property and that I can roll the proceeds into your broadly diversified Income plus fund? And the answer is no, because what we talked about earlier, the Income plus fund is not like kind to real estate. And so we wanted to think of a way that we can potentially get investors that diversification that they're looking for, looking for and not have to continue to do those swaps and pay fees every time they roll into a new dst. So the structure that we've come up with is sort of a two stage 721 solution. Because typically our investors are not selling things that we want to own in the income plus one. We're buying $50 million plus apartment buildings in our target markets. And so we can't do a single stage 721 where we're buying our investors assets from them. But via this two stage solution, we could potentially do it. So the first part of this, where you see the 10:31 exchange, that's what we just spent the last kind of 15 minutes talking about, you would sell your property to a third party buyer. Cash would go to a qualified intermediary. You would eventually roll into the DST with Origin and let's just say it's that $100 million apartment complex in Dallas. You would own that for typically two years. During that time period, you get all of the cash flow, you get any appreciation that comes with that property and you still get the depreciation benefits as well. You can write off any of that income if you've got cost basis to do so. After two years in the dst, our, our broader fund, the Income Plus Fund, has the right to, to acquire the dst. And if they choose to exercise that option to acquire the dst, instead of issuing cash to the investors, we would issue what's called operating partnership units. Those operating partnership units are pari pursued with every other investor in the Income Plus Fund. So now your risk would be spread across the entire portfolio. You'd receive the same income as Income Plus Fund investors and any growth in the nav as well. And so why do our investors tend to prefer this solution? Well, number one, it's the continued tax deferral. Most of our investors are looking for income. So if you need current income, the income plus fund is generating a 6.3% yield right now. It's highly competitive. If you don't need the income, say you're five years, 10 years away from retirement. This is something where you can roll into the income plus one and you can reinvest the dividend and that growth will compound for you on a monthly basis. So you build up the number of operating partnership units that you have over time. And when you do retire five years from now, ten years from now, now you'll have a much larger capital base where you can start drawing the income off of that in retirement. Sort of a retirement tax, retirement income planning solution as well. Enhanced liquidity, I think is maybe not talked about enough. When you own commercial real estate, a million dollar piece of farm ground, let's say you either sell it for $1 million or you don't sell it. You have $0 when you do a 721 exchange and you own a million dollars of operating partnership interest in the Income Plus Fund. You are now on the same redemption schedule as cash investors into the income plus fund. So if you needed to pull out 100,000 or 50,000, you can always make redemptions in the income plus fund. Now that is subject to our liquidity policy. But at least you've got some liquidity option where in the past you didn't have that. So you're kind of getting more liquidity in your real estate portfolio. But I think the bottom two are probably the most important and why people want to do 721, number one, is estate planning. So folks start to think about who's going to take over this real estate when I'm gone, who can manage it, who can appeal the property taxes, who can collect rent, who can negotiate. And some people start to think, will this be a burden to people that have to run it. Now you can put it into a diversified portfolio that's run with professional management and it's an easily divisible security. So split it up to your beneficiaries and when they receive the interest, they will get a fully stepped up cost basis. So if they wanted to sell the interest, it would be tax free to them. If they didn't need cash, they could continue to own the investment themselves, but they would have a stepped up basis. So if they ever decided to sell it, it'd be a lower tax bill if it went up in value and then finally diversification. Right. So right now the real estate that you own is tied up in a single asset or a group of assets. And that's what we call idiosyncratic or single asset type risk. It's a lot of the times why people invest in mutual funds instead of owning individual stocks. And so by rolling into a diversified portfolio, it eliminates that idiosyncratic risk out of your portfolio. And it's just like we said, as you move along that investor life cycle from your growth phase to accumulation phase and now you're sort of in that risk mitigation stage. Preserve and protect my capital. This is going to de risk your portfolio. So finally, just want to touch a little bit about maybe some hidden fees. You know, I talked about this a little bit earlier with the swap until you drop and how that there's typically going to be fees along the way. And if you think about how the best of the best do, and if you don't know who Charlie Munger is, very, very interesting investment professional. He just passed away at 99 years old, I think at the beginning of this year. And he was Warren Buffett's right hand man at Berkshire Hathaway for 50 years or something like that. Really great guy. Look him up on YouTube sometime. Great thoughts on the market and investing. But one of the things that Warren and Charlie were very big on was hidden fees. And this is a quote from Charlie. It's one of my favorites. The first rule of compounding is to never interrupt it unnecessarily Sometimes like with the typical drawdown structure in real estate funds, you can make a lot of money. Cash comes back to you and of course you have to pay taxes, then you can invest what's left over. And so with a 721 solution, it's one of our thesis that one of the best paths to long term wealth is to stay invested in the market without the transactional fees and hidden fees of taxes. And so this Long term growth chart is just meant to show three options. So basically you're selling a million dollar property. In this example, the red bar is if you just paid the taxes at 30%. So it starts out at 700,000 invested and you're just investing in a 6040 portfolio. That type of portfolio is averaging 8.1% annualized rate of return over the last 40 years. So that's what I've marketed here. 6040 just means 60% stocks, 40% bonds. The blue bar and the gray bar are essentially the exact same dst. Okay, One of them you're going to sell every five years and pay the same upfront load and earn the same rate of return. They're both annualizing out to about a 10% annualized rate of return. The blue bar is where you just pay that fee one time to get into a 721 and then you stay invested for the long term. So keeping in mind that the blue bar and the gray bar are both earning the exact same annualized rate of return, you can look at the difference in growth over a 15 year time horizon. So earning the same rate of return, the 721 solution earns you a 23% increase in wealth. The problem with this market, in my opinion is that if you were somebody invested in the gray bar, you'd be very, very happy. You would have turned your million dollar investment into, I don't know, 2.6 million. But you didn't know that because you're paying these fees all along the way. It could have been much, much higher. Now this is assuming these investments earn the exact same rate of return. I do think at origin, because of our structure, because we won't be invested in DSTs for the long term, that your return actually will outperform the DST market. But just to keep apples apples. And then of course comparing it to should I pay taxes and just invest it into the 6040 portfolio, frankly it's not even close. So a million dollar Investment in a 721 grows to about 3.8 million and swap till you drop. In a market DST grows to about 3 million. So an additional $800,000 in profits by staying invested for the very long term. And then finally just touch on the income plus fund. I think a lot of the folks in this group are invested income plus one and know it well. One of the things that I like about the origin story again is going back to our founders, Michael and David. They have significant wealth invested alongside you. They've got $90 million of their own personal wealth invested into different origin vehicles. And so this is our All Weather fund. Again, we only focus on multifamily. We only focus on our target markets that we discussed earlier. And this, this fund is meant to get the best risk adjusted returns that it can at any given time. So I think it's got a very good name income. We kick off right now 6.3% but average, you know, 5 to 7 plus growth. And so if you kick off a 6% dividend and you generate a 4% growth annualized, it's going to get you to about 10% annual rate of return. So you see our targets there between 9 and 11%. Now when I mentioned All Weather, that's because we can have a tactical portfolio allocation. So if it makes sense to build properties, then we'll build them. If it makes sense to buy properties, then we'll buy them. If it makes sense to lend against properties, we will lend. And so we can pivot during different economic markets to be getting the best risk adjusted return for our clients. If you followed our story and if you followed kind of our webinars, you know that we just came through a period of stress testing where we did exactly that. We haven't bought a common equity asset in this fund for four years. And that's because we saw interest rates were going to go up. Rising interest rates makes the value of real estate assets go down. And so we started lending. It's good to lend in a market where rates are going up. We did pref equity preferred equity positions and so that shift really protected income plus fund investors. Now we just had a webinar in January talking about time to go on offense. We see distress in the market, we see opportunities in common equity. We see a place where we think we can outperform the market. So we are making a tactical shift back to more common equity investments in this fund. And finally we're focused on multifamily. Many, many reasons. We like multifamily. It's a need, it's not a want. We are severely under housed in multifamily in this country. Also the lending is subsidized through the agencies Fannie Mae and Freddie Mac. So you get better financing on multifamily. It's very easy to backfill as opposed to retail or office and those we don't really deal with. And so multifamily, as you can see from this chart, has had the best risk adjusted return or return per unit of risk of any of the major asset classes. And according to multilytics we're very, very bullish going forward on being able to raise rents in the markets that we are in. And so this fund will be 100% focused on multifamily, which is, we think a safe place to land. So just to quantify that for a second, if you look at the Income plus fund, so I mentioned that we made the shift which protected investors. So it's one thing to say it here, we like to sort of prove it. NCREIF Odyssey Index kind of rolls off the tongue. National Council of Real Estate Investment Fiduciaries. Odyssey is basically a diversified core portfolio of similar type of assets that we would own. Essentially it's just owning market data, it's just owning common equity. And so you can look over the trailing year, we're up 2.6%. Is that a lot to write home about? Well, when interest rates go up 525 basis point points, it is. I mean, you can see we've outperformed the odyssey index by 13%, so pretty significant, protecting that tail risk. And then over the long term as well, we've averaged about 8 compared to that 3. So just to kind of summarize everything up before we, you know, go into question and answer, I think there was meant to be a lot of education in this. There's meant to show that doing your own 1031 exchange can be a little bit difficult. Origin has a turnkey solution where we've cut the fees significantly and have an institutionally priced option available for you. You can work directly with us. We put more capital into the ground investing in institutional quality real estate assets where we focus only on multifamily only in our target markets with the potential option to upgrade into the 721. So I know that's a lot and obviously, you know, open to questions. I think as well, you know, if you have a specific case, you know, I mentioned I would have my, you know, booking link on here. You can always email me as well. Again, it's just my first initial last name with no apostrophe. So M O S H e a@origininvestments.com so you can feel free to shoot me an email. You can scan this QR link which will take you directly to my booking link as well. And you can find a time to chat about your, your specific case or property that you might have for sale.

All right, Mike, thank you so much for a great presentation on 1031 exchanges. DST721s as well as Origins specific products and how they can Help investors. Let's go ahead and let's do some Q and A here. I want to talk first of all, just to clarify a few things on how the technicality of this works. Now, if you're coming into a DST with debt, right, you've got $500,000 in equity and $500,000 in debt and you want to get out of the individual property business. You want to get into a DST and you say you have to keep that debt essentially or replace it with cash. If you don't have the cash and you want to keep the debt, where is that debt? What is that debt? Is that debt you hold personally? Is that a mortgage you go out and get against your DST shares? What does that look like exactly?

Yeah, that's a great question. So we will typically lever our DSTS 45 or so percent loan to value so that debt is secured against the asset. Again, it's going to be agency debt that you otherwise couldn't get on your own. So lower interest rate, better terms, etc. When you come into our deal, you will invest the equity, but you will also assume that 45% leverage position. So we can do individual math if you want to set up a call. But the easy way to think about is what is my loan to value on my relinquished property? I need to find a DST that has that same loan to value or greater. So say we're 45% leverage. If you're 45% or under on what you're selling, you could roll directly into our deal and be a tax free exchange for you. If you're 45% or higher, you would just have to add some cash and we could kind of go through that math. And then to answer your question about the is it recourse to me? Good, great question. Thank you for asking. The debt is non recourse to our investors. That means the only recourse the bank would have is the actual debt building itself. So the only equity at risk in the deal is the cash you put in. There's no recourse beyond that.

Okay, and let's talk a little bit more about these DSTs that origin is setting up. Is the plan for Origin just to always have a DST available or is there going to be a timeline where you can do an exchange and other times where you can't? Is this going to be a series of DSTs? What's it going to look like exactly?

Yeah, yeah. Another great question. I think this is a, it's, it's sort of a Difficult business to run. As you can imagine, it's kind of a real estate fund in reverse. We have to go buy a property structure in a DST and then we take investors equity in and replace our equity with theirs and then we go do it again and again. So we kind of have to know what is our investor demand, how much are we going to have to have out in the market and then we go find and close on those properties. So to answer your question, the idea is like we've got a deal that's opening up next week. We've got 36 million of equity. It's called the Starling. It's in Princeton, Texas. So if you just googled the Starling in Princeton, it would pop right up. It's about a $60 million asset, 300 unit apartment complex, two years old and we've got about 20 million of that pre reserved. So we've got about 16 million of equity we left in the Starlink. And we're already starting to underwrite deal number two. We've got one that we're looking at in Tampa, one we're looking at in Austin, Texas. So what we'd like to have is maybe one deal a quarter. I call 30 to 50 million of equity. So you know, 150 or so million of equity per year is a good kind of target, you know, to satisfy the investor demand.

Okay, so each of these DSTs is gonna be a single property, essentially.

It will, yeah. Yep.

And how long will people stay in the DST before that 721 option becomes available? Is this gonna be like a 5 year hold? You gotta wait until that property's actually sold or could you turn around the next month and exchange into the Income plus one?

Yeah, so the Income plus fund is the one with the options. So the investors that go into the DST can't trigger anything. The option starts two years after the DST is sold out. So once that two year window opens up, then our Income plus one has the right to acquire that asset at any point after that. And I may just well answer the. We get this question so often. What if the income plus one doesn't acquire the asset? Then what happens then? Well, simply if there was some reason where the income plus one didn't want to acquire this asset, then you would just stay in the DST and we would just continue to run it like any other asset. We would increase revenues, lower our expenses, grow the noi and we would just sell it. In that case you would retain your ability to do a 1031 exchange. And hopefully at that point, if that did happen, we would have another DST open that you could just roll back into. So that's kind of how it works. Anytime after that two years, the Income Plus Fund has the right to acquire the asset.

So there's no guarantee if you exchange into a DST that you will for sure be able to get into a fund eventually.

That's correct. There's no guarantee. That's right.

And as far as these properties, these DSTs you're getting into, when are the distributions going to begin from those? From the time you exchange. You know, if this is the income you're living on from the property you currently own, how long until you're going to start getting paid?

Yeah, I think people are surprised how turnkey this can be. Let me just give you a quick example. So let's say you really like the Starling deal and you were selling your property September 1st. You know, we get in a conversation, say, hey, I really like it. So sometime in August, you would set up a qualified intermediary. You could do all the paperwork with us. We're basically just at this point waiting for you to sell. On September 1, you go to close. On September 1, the money goes to the QI. QI wires us the fund. So maybe you're in our deal September 3rd or 4th, however long the wire's sake, you're going to get all of September. Well, the prorated September distribution paid in October. So you could literally be out of the market for one or two days if you did this in advance.

Okay. And once you do 721, exchange into the income plus fund and you decide to exercise your liquidity option, that's going to be fully taxable to your original basis.

Correct.

That'll be adjusted to whatever you bought your property for 30 years ago.

That's a good question. So when people ask about the taxation, if you ever take principal. So whether you sell your property or whether you do your own 1031, or whether you do a 721 forging, if you decide to sell your principal and put the money in your pocket, that's going to be taxable. And if you look at your entire portfolio, it's probably going to be the most taxable part of your portfolio, because people have owned these assets for a very, very long time. Their basis is almost nothing. So, yes, to answer your question, you're going to roll back to that original cost basis. Almost all of it will be taxable should you choose to liquidate it.

Okay, now it sounds like origin is not Going to serve as the qualified intermediary. Why not? Why can't they add that service as well?

That's right. I think, you know, it's something where you got to say, what do we do well, and can we add value there? And qualified intermediaries are almost like banks that are very exclusive to one little part of the business. So they're typically accountants, they're typically tax attorneys, they're typically real estate attorneys that are very transactional in nature. So that amount of knowledge that they've built up over the last 10, 20, 30 years, it would be almost impossible for us to compete with them. They do it so well. Their fees are very, very reasonable. And so that's something that I've got probably five or six very, very high quality firms that I work with that I just will usually refer people to. But there's a lot of qualified intermediaries out there that are really great. So I think, to answer your question, it's not what we do. So we want to focus on what we do well.

Okay, let's go back to your discussion of fees. You talked about the fees for this being 1.5 to 2.5%. Is that of the whole value of the exchange or is that just your equity that that percent applied to?

Yeah, so when we're using debt, it gets a little complicated. So take our acquisition fee, for example. We have a 1% acquisition fee. So if our starling is 60 million, we have a $600,000 acquisition fee. And if we're using leverage, we're raising $36 million. So if you take 600 into 36, it's going to come out to a little bit closer to 1.8% or something like that. So that's where I'm saying we're putting 97 cents of every dollar. So I like to quote it on equity because that's where the fee sort of comes from. But yeah, we've got 1% purchase price acquisition fee and then the 50 basis points of O and O, that's on equity.

The second fee's on equity. The first one's on the whole purchase price, correct?

Yep.

Now you mentioned that going rates in the industry are 10 or even 15% for fees for, for facilitating an exchange into a DST. Why is it that you're able to do it so much cheaper? Is everybody else just ripping us off?

Yeah, well, obviously we get that question quite a bit. And somebody said to me, when you, when you go to a restaurant and the food comes late, you're angry, but if the Food comes too quickly, you're worried. And it was kind of like, what are you guys working for free? And I thought that was a really good analogy. It's not. You got to remember when you have all of those fees out there, they are not all going to the sponsor. They're not all going to Origin. Most of them are going to a network of brokers where it's the broker's job to find clients and then put them in the dsp. So they're essentially paying third parties to raise capital for them. And we just have a different business structure where we go directly to investors and you can sort of cut out the middleman. So all those fees wouldn't have gone to us anyways. But there are other ones that we've cut. Like somebody sent me a deal the other day. It was not a very high quality sponsor, but they said, can you mind looking. Would you mind looking at this? And their acquisition fee on equity was 7%. And so, you know, so yes, we are cutting some of the fees that we just think are egregious. They're charging too much. But for the most part, we're just. What we're doing is we're cutting out the whole middleman fee and just getting rid of that. We're going directly to investors, and that's where the cost.

Okay, can you walk someone through the timeline? I mean, someone's listening to this, this webinar and they're like, oh, yeah, this is what I want. I'm sick of owning this, you know, Quadplex I've got down the street that I've had for 20 years. This sounds perfect for me. Talk to them about their process and timeline. They call you up today.

Yeah, that's great. I. I sometimes put it back on them and say, well, you know your market. How long would it tell you to. How long would it take you to sell that 4 Plex or what have you? So sometimes people say, I've got standing cash offer. If I listed it, I know I could sell it in 60 days, that type of thing. So once we kind of know what your closing date is, that's when we start looking for, you know, for people that are telling me they're gonna. They're listing the property now. It's like, we're probably gonna be in the deal after Starling. Right? Starling is probably gonna be sold out. And then you're probably gonna sell your property in October. Right. By the time you actually close on it. So then we'll roll that into the deal that we have available in the fourth quarter. And then from your timeline of getting in, it's very simple. Everything starts working once we have a closing date. So if you knew October 1st was your close date, we would just get that qualified intermediary set up in September. The money goes to the qi. You would identify our DST with the qualified intermediary. You'd reserve equity with our investor relations team. And then it's as simple as filling out a subscription document online and having the QI wire the funds and we close the ticket. It's a very simple process.

And do we have to find our own qualified intermediary or do you have a list of them that you refer us to or how does that work?

I have some great ones. It doesn't matter to us who you use, but I recommend using big qualified intermediaries that are familiar with dsts if you want to find your own. If you need a qi, just email me. I've got a list of five or six great firms that I work with quite frequently.

And what are their fees typically? Do you know?

Yeah, good question. Most of them are between 12 and $1400, flat fee. If you're doing multiple exchanges, they'll typically give you a discount. And I've seen an emergence. I can't speak to these companies, but I've seen an emergence of like solely online QIs where you don't even talk to anybody, just fill out all the paperwork online and they'll typically do it for like five or six hundred dollars. But again, I've never worked with them, but I have had investors use them and say they were just fine. So if you want to save a couple bucks, you can use like an online qi. But I tend to like, you know, these people typically have been doing this for 10, 15, 20 years. I like asking them questions about my deal and feeling safe and secure, but that's kind of where the fees kind of range.

Now, some people, you know, particularly as they're getting to the stage of life where they're trying to get out of the individual property business, risk is the most important thing to them. Can you talk about the risk of what they're coming out of and what they're going into, especially if they've got a property that's paid off or nearly paid off and now they're going back to a leveraged investment?

Yeah, no, that's a great question. I think it. Obviously that's a. It's difficult answer is a hypothetical because I don't know what you're telling. Right. But what you are Selling would typically be a non institutional property and it would have again, idiosyncratic risk. Maybe it gets, maybe it's in a hurricane zone, maybe there's a fire, maybe you can't get proper insurance on it. Maybe the part of town it's in gets. You know, there's a highway that goes on the other side of town. And now your Property is worth 75% of what it used to be. So there's all that risk that comes along that you just simply can't control. So that's why even if it happens a lot in the stock market, where it's like, oh, I've worked for IBM for my whole career and 80% of my net worth is tied up in IBM. And this is a constant conversation that you have to start diversifying that holding because we love that company too. You never know what's going to happen in the future. And so when you roll into our deal, yes, it's levered, but you have to remember that leverage, when you get in commercial real estate, like 75% leverage is like high. What we're leveraging these assets is about 45% at the property level. That's very, very low leverage, meaning you'd have to have a 55% decline in value before it ever started affecting the debt. And so the debt, as long as the interest rate is lower than the cap rate, it's going to increase your cash flow and it's going to increase the overall return to you. But the real benefit of the risk mitigation is rolling into a diversified portfolio where your risk is spread across several assets. I'd say going up into a higher quality institutional property with professional property management is a huge de risker because we're constantly appealing property taxes. We're watching the property every single day. We're using AI to discover how much we should be charging for rents and maximize the growth of the property. It's just something that a passive real estate investor is not going to be doing on their own. So I think you're greatly de risking your portfolio, typically. Right. I don't know everybody's asset that they currently own. But you're typically de risking your portfolio pretty significantly by doing this investment.

Now Origin offers another solution to people who you want out of properties and into funds but are concerned about the tax consequences. They have Opportunity Zone funds. Can you talk about who might want to use an opportunity zone fund versus a 1031 exchange? Yeah.

So remember, if it's real estate, you could do a 1031 exchange or an Opportunity Zone Fund. If it's anything else, your only choice is an Opportunity Zone Fund. So if you've got highly concentrated stock, positions, appreciated stock, you're selling a private business, personal property, any capital gain that can go into an Opportunity Zone. If you're looking at real estate, typically this answer can get a little complicated. But typically if you have a higher basis and lower debt, people tend to like the Oz. Let's just say for example, you have a million dollar sale but your basis is like 700,000 and you have no debt on it. That means that all you have to do is put the $300,000 of gain into the Opportunity Zone fund. You get, keep the $700,000 tax free in your pocket because that's your cost basis. If you did a 1031 exchange, you'd have to roll the entire million. So again, if you have that high basis and you can pull your basis out tax free, people tend to prefer the Opportunity Zone Fund. But they're also not very similar in terms of risk. The Opportunity Zone, remember, is ground up development. So it's not going to kick off any cash flow for the first four or five years. And you're also taking entitlement and development and lease up risk. And we believe you're going to get paid for that risk. But it is a riskier investment than a 1031. A 1031 is a stabilized cash flowing asset that starts kicking off income on day one.

Awesome. Well Mike, we sure appreciate your time and your expertise sharing with us. I think a lot of people that listen to this will have learned a lot. Whether or not they're interested in leaving. What they're doing now and exchanging is hard to say. But for those who are, here's a great opportunity, low fees, turnkey solution. So we appreciate you making us aware of it.

Yeah. And I appreciate you having me on and obviously a lot here to absorb and I know everybody's case is specific to them. So I'd love it if we could set up some individual calls to discuss what's important for you. And thanks so much for the relationship with origin. And thank you for your time today. Much appreciated.

Thank you. So this has been a webinar, White Coat Investor real estate webinar. If you want more information from Michael again, his email is Moshe@origininvestments.com thanks so much for your time today.

Thank you. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized. Financial advice. You should consult the appropriate professional for specific advice relating to your situation.