Capital Square, one of the nation’s leading sponsors of tax-advantaged real estate investments and an active developer and manager of housing communities, announced the successful UPREIT transaction for High Ridge Apartments, a 160-unit multifamily community in Athens, Georgia.
In the UPREIT transaction, over 71% of the DST owners (by value) exchanged their DST interests for operating partnership units in Capital Square Apartment REIT, Inc. in a tax-advantaged transaction under Section 721 of the Internal Revenue Code.
Capital Square originally acquired the property for $15.5 million in 2017 as sponsor of the DST/Section 1031 exchange program. As a result of the $26.9 million UPREIT transaction, the DST owners realized a 226% equity multiple and total return of over 185%.1
“The DST structure has worked exceptionally well for the past decade but has a number of limitations. DST properties must be sold when their loans mature, and no additional capital can be added, even when in the owners’ best interests,” said Louis Rogers, founder and co-chief executive officer of Capital Square, and also a proponent of the DST structure as a tax attorney and sponsor. “Capital Square has an outstanding portfolio of DST properties, including High Ridge Apartments, that should be held longer than permitted as a DST, gaining further advantages such as cash flow, future appreciation and numerous REIT benefits, including liquidity options.”
Unlike many UPREIT transactions, Capital Square uniquely afforded its investors multiple options to exchange their DST interests for operating partnership units in the REIT without taxation under Section 721, structure another exchange to continue their tax deferral under Section 1031, or cash out all or a portion of their investment on a taxable basis.
Rogers added, “UPREIT transactions have been around for a long time. Sam Zell is well known for the UPREIT strategy that allows owners to diversify and reduce risk by exchanging their single property for units in a REIT’s operating partnership that owns a much larger portfolio.
“In the High Ridge UPREIT transaction, DST owners were given full market value for their interests. Each owner had the option to choose (i) operating partnership units, (ii) cash to do another 1031 exchange or (iii) cash out on a taxable basis. At Capital Square, we believe investors should have the right to choose; this ‘voluntary UPREIT’ is in the best interests of the DST owners.”
Regardless of the option selected, all investors were treated equally, with the same fair market value purchase price based on MAI appraisals and an identical fee structure.
High Ridge Apartments is centrally located near Georgia State Route 10 Loop, U.S. Route 78 and U.S. Route 129. Residents benefit from access to the region’s nature parks, entertainment venues, upscale shopping hubs and numerous dining options. The property is less than a 15-minute drive from Athens’ top employers, including University of Georgia, Piedmont Athens Regional Medical Center, Athens-Clarke County Government and Clarke County School District.
The $26.9 million fair market value of High Ridge was established based on the average of two independent MAI appraisals. Additionally, the board of directors of Capital Square Apartment REIT obtained a fairness opinion from Robert A. Stanger & Company, a third-party investment banking firm.
The original Fannie Mae loan with a favorable interest rate was assumed by the REIT and a supplemental loan was made by Fannie Mae at closing. Walker & Dunlop, Inc. was instrumental in the origination of the original loan and the new supplemental loan.
“The sale of High Ridge Apartments demonstrates Capital Square’s ability to deliver attractive total returns to DST investors, providing a significant appreciation in value over a seven-year holding period,” said Whitson Huffman, co-chief executive officer. “The High Ridge DST investment provided investors with access to higher quality real estate than they would have been able to afford on their own through an efficient 1031 exchange process. Investors who participated in the UPREIT transaction received enhanced portfolio diversification and greater cash flow along with numerous REIT benefits, including liquidity options.”2
Since its founding in 2012, Capital Square has acquired more than 170 real estate assets for over 6,500 investors seeking quality replacement properties that qualify for tax deferral under Section 1031 of the Internal Revenue Code and other investors seeking stable cash flow and capital appreciation. The firm has a portfolio of 53 multifamily apartment communities, 13 age-restricted manufactured housing communities in Florida and seven build-for-rent communities, with a total investment cost of over $4.8 billion.
