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 contribution of Marina Pointe, a 308-unit multifamily community in Chattanooga, Tennessee, to Capital Square Housing Trust, a REIT sponsored by Capital Square.
The transaction was completed through an umbrella partnership real estate investment trust (UPREIT) structure on behalf of investors in CS1031 Marina Pointe Apartments, DST, who contributed their DST interests to Capital Square Housing Trust’s operating partnership.
Over 62% of beneficial ownership (59 investors) opted to continue their investment with Capital Square by contributing their DST interests to Capital Square Apartment Operating Partnership, L.P. in a tax-advantaged transaction under Section 721 of the Internal Revenue Code. Capital Square used a portion of the proceeds of its Series 1 preferred stock offering to fund investors who opted to structure another Section 1031 exchange or to cash out.
Capital Square originally acquired the property on behalf of the DST investors in October 2020 for $44.5 million as sponsor of the DST/Section 1031 exchange program. Following the $57.5 million UPREIT transaction, distributions to DST investors are projected to increase over 22% based on the appreciation in value.1
“When the time comes to sell appreciated real estate, many owners structure Section 1031 exchanges to defer the taxes,” said Louis Rogers, founder and co-chief executive officer of Capital Square. “Over time, an increasing number of exchangers acquire a DST, such as Marina Pointe, as their Section 1031 replacement property. Because of tax rules, DSTs have a limited holding period, which means that DST properties must be sold, and another exchange must be structured, to continue the tax deferral. Many exchangers have told us they would prefer a permanent solution, permanent tax deferral, which is not possible with a DST. Capital Square has responded to the request for permanent tax deferral with Housing Trust’s UPREIT program – where exchangers contribute their DST interests to the REIT and have the ability to hold REIT interests for life, providing permanent tax deferral along with many REIT benefits, including property diversification and retention of tax benefits. The DST-to-UPREIT transaction is the next stage in the institutionalization of retail real estate investing from a simple whole property, then to an interest in an investment-grade DST and now, to an interest in a large, diversified REIT.”
Unlike many UPREIT transactions, Capital Square affords its investors complete optionality. Each investor chooses whether to:
- exchange their DST interests for operating partnership units in the REIT without taxation under Section 721,
- structure another exchange to extend their tax deferral under Section 1031 of the Internal Revenue Code, or
- cash out all or a portion of their investment on a taxable basis.
Regardless of the option selected, all investors are treated equally, with the same fair market value purchase price based on appraised value.
Located at 5750 Lake Resort Drive, the 308-unit multifamily community is situated on 20.578 acres of land. Marina Pointe features one- and two-bedroom units, ranging in size from 760 square feet to 1,414 square feet. Additional amenities include detached garages, storage units, a clubhouse with a resident coffee bar, a cybercafé, playground and outdoor grilling stations.
Situated within an affluent submarket of Chattanooga and adjacent to Lake Chickamauga and the Tennessee Valley Authority (TVA) Big Ridge Small Wild Area, Marina Pointe offers residents unparalleled access to multiple outdoor amenities in a serene lakeside setting. Additionally, the property is approximately 15 minutes away from Chattanooga’s two main employment centers, Enterprise South Industrial Park, home to Amazon and Volkswagen plants, and Downtown Chattanooga, home to BlueCross BlueShield of Tennessee and over 60,000 employees.
The $57.5 million fair market value of Marina Pointe was established based on an independent MAI appraisal. Additionally, the nominating and corporate governance committee of the board of directors of Capital Square Housing Trust obtained a fairness opinion from Robert A. Stanger & Company, a third-party investment banking firm.
“The successful UPREIT transaction for Marina Pointe demonstrates the strength of Capital Square’s investment platform and our commitment to delivering exceptional outcomes for investors,” said Whitson Huffman, co-chief executive officer and chief investment officer. “By providing investors with multiple options – including the ability to exchange into REIT units on a tax-deferred basis – we are helping them preserve wealth, diversify holdings and participate in the long-term growth of a tax-advantaged multifamily portfolio in the nation’s fast-growing Sun Belt.”
Capital Square Housing Trust now owns six multifamily communities with a gross asset value in excess of $270 million, based on purchase price.
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 55 multifamily apartment communities, 13 age-restricted manufactured housing communities in Florida and seven build-for-rent communities, with a total investment cost of nearly $5 billion.
