Cove Capital Acquires Two Properties for Texas Small Bay Industrial DST 86 Offering

Delaware statutory trust company Cove Capital Investments LLC recently completed the acquisition of two properties to finalize its, in total, five-building industrial DST offering in Texas, which seeks to raise nearly $14.8 million.

The Texas Small Bay Industrial Portfolio 86 DST provides investors the opportunity to invest in a newly constructed small bay Industrial portfolio in the Greater Houston region.

“This small bay industrial portfolio is compelling for a number of reasons. First, we believe there are potential opportunities for adding value as leases roll whereby we will seek to bring them to market rates. Second, the ability to potentially pass inflationary expense increases onto our tenants via the in place triple net leases at the properties,” said Dwight Kay, managing member and co-founder of Cove Capital Investments.

“Third, this small bay industrial portfolio DST offering is a fully debt-free investment that was created with the purposeful investment strategy of mitigating common risks associated with real estate debt, such as mortgage foreclosure, cash flow sweep clauses, and go-dark provisions,” added Kay.

The small bay asset class has become the darling of industrial real estate in recent months, according to the company, as investors are attracted to smaller properties with multiple tenants because they provide the opportunity to add value by potentially raising rents to market rates with lease terms that are typically 12 to 36 months. In addition, investors face less risk from large event vacancies as small bay assets commonly involve multiple tenants across a wide variety of industries as opposed to larger, single-tenant industrial properties.

The recently assembled DST portfolio includes two properties with a total of five buildings located in the greater Houston metropolitan statistical area.

The first property is located in Katy and includes three buildings totaling 29,165 square feet. The asset is 100% leased and was built in 2023.

The second property is located in Richmond and consists of two newly constructed buildings situated on 2.52 acres with a total of 40,000 net rentable square feet. Located in a dense residential corridor of Southwest Houston with a population of more than one million people located in a 10-mile radius, this small bay industrial asset is also 100% leased.

“Another important aspect of the Cove Small Bay Industrial DST 86 portfolio is that it provides investors the possibility of using the 721 exchange rollup as a fully optional exit strategy. Unlike many sponsors with forced 721 UPREITs, Cove Capital provides investors with full optionality whereby they are able to participate in the 721 UPREIT if they choose to do so … This full optionality is a key differentiator in today’s marketplace of DST and 721 UPREIT vehicles.” said Chay Lapin, managing member and co-founder of Cove Capital Investments.

Cove Capital’s executives also highlighted the offering’s 20-year tax protection agreement for those who choose to do a 721 exchange rollup. Kay said that in the 721 UPREIT marketplace, many offerings lack such agreements entirely or offer just limited protection for two to five years.

“The 20-year duration provides meaningful peace of mind – should the REIT sell the contributed DST property without executing a 1031 exchange, the REIT has committed to covering the investors’ federal and state capital gains tax liabilities,” concluded Kay.

In fall 2024, Cove Capital completed the purchase of a small bay industrial asset in San Antonio, Texas. The property comprised the firm’s Texas Small Bay 85 Flex DST, another Regulation D, Rule 506(c) offering targeted to raise just under $15.4 million. Prior to, Cove Capital acquired the General Time Industrial Park Opportunity 84 DST in Athens, Ga., and The Peanut Factory Lofts through Cove Capital San Antonio Multifamily 74 DST.

Cove Capital Investments is a DST sponsor company providing accredited investors access to 1031 exchange-eligible properties, as well as other real estate investment offerings. The team consists of acquisitions, asset management, accounting, due diligence, in-house counsel, investor relations, marketing, and capital markets. Cove Capital has sponsored over 2.6 million square feet of 1031 DST and real estate offerings in the multifamily, net lease, industrial, and office sectors in 33 states nationwide.

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