Capital Square Delivers Total Return of 185% to Georgia Multifamily DST Investors via ‘Voluntary’ UPREIT Transaction
Capital Square, a sponsor of tax-advantaged real estate investments, announced the completion of an UPREIT transaction for High Ridge Apartments, a 160-unit multifamily community in Athens, Ga. that had been owned as a part of a Delaware statutory trust program.
In the UPREIT transaction, the company says more than 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 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%.
“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,” Rogers added.
Unlike many UPREIT transactions, Capital Square says it provided its investors multiple options in the transaction aside from exchanging their DST interests for operating partnership units in the REIT without taxation under Section 721; they were also offered an opportunity to structure another exchange to continue their tax deferral under Section 1031 or to cash out all or a portion of their investment on a taxable basis.
“In the High Ridge UPREIT transaction, DST owners were given full market value for their interests. Each owner had the option to choose operating partnership units, cash to do another 1031 exchange, or 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.”
Capital Square reported that, 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.
The $26.9 million fair market value of High Ridge was established based on an independent MAI appraisal. 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 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,” Huffman added.
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.
Capital Square is a real estate firm specializing in tax-advantaged real estate investments, including Delaware statutory trusts for Section 1031 exchanges and qualified opportunity zone funds for tax deferral and exclusion. In recent years the company has become an active developer of mixed-use, multifamily properties in the southeastern United States, with eight current projects totaling approximately 2,000 apartment units with a total gross asset value of $730 million. Since 2012, Capital Square has completed more than $7.8 billion in transaction volume.
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