Capital Square Delivers 161% Total Return on $72 Million UPREIT Transaction with “Full Optionality and Investor Equality”

Capital Square, a sponsor of tax-advantaged real estate investments, announced the completion of an UPREIT transaction for Saltmeadow Bay Apartments, a Class A, 229-unit multifamily community in Virginia Beach that had been owned as part of a Delaware statutory trust program.

The company says that more than 85% of the DST investors (by value) exchanged their interests for operating partnership units in Capital Square Apartment REIT Inc. on a tax-deferred basis under Section 721 of the Internal Revenue Code.

Capital Square originally acquired the property for $48.6 million in 2019 as sponsor of a Section 1031 exchange program. As a result of the $72 million UPREIT transaction, the DST investors realized a 161% total return.

“This is the first UPREIT transaction of its kind that provides full optionality and investor equality regardless of their individual choice. Capital Square encouraged investors to work with their financial advisors to select the option that best fit their risk/return parameters, resulting in 85% of investors selecting the REIT option,” said Louis Rogers, founder and co-chief executive officer of Capital Square. “By combining favorable tax treatment with increased cash flow, greater diversification and many REIT benefits, the UPREIT transaction was an overwhelming success in spite of current challenges in the economy.”

Unlike typical UPREIT transactions, Capital Square says they uniquely afforded investors multiple options in regard to the disposition and provided equal treatment regardless of the option selected. Investors in the Capital Square DST/1031 exchange program could elect to:

• Exchange their DST interests for operating units in Capital Square Apartment REIT on a tax deferred basis under Section 721,
• Structure another Section 1031 exchange to continue their tax deferral, or
• Cash out all or a portion of their investment on a taxable basis.

Regardless of the option selected, Capital Square says all investors were treated equally, with identical fee structures and receipt of the same fair market value purchase price based on MAI appraisals. In other UPREIT transactions by industry sponsor companies, investors who fail to participate in the UPREIT are often charged higher fees on the full-cycle deal, resulting in a lower total return, according to sources.

Located at 757 Saltmeadow Bay Drive, the 24-acre property is comprised of four four-story residential buildings. Constructed in 2006, the community has one-, two- and three-bedroom floorplans ranging in size from 866 square feet to 1,598 square feet. The gated community features a resident clubhouse, controlled-access buildings, elevator-serviced buildings, a resort-style swimming pool, 24-hour fitness center, dog park, onsite storage and covered parking and garages.

The $72 million fair market value of Saltmeadow 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 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 as well as the new, supplemental loan.

“The sale of Saltmeadow Bay Apartments represents an exceptional full-cycle event for our DST investors, who benefited from a significant appreciation in the value of their investment over a relatively brief holding period of just four years,” said Whitson Huffman, co-chief executive officer. “The majority of these investors have chosen to continue their tax-deferred investment by participating in a 721 exchange into Capital Square Apartment REIT, which will provide them with enhanced diversification and greater cash flow via the higher annual distribution rate paid by the REIT.”

Rogers added, “This is the first of many optional UPREIT transactions that Capital Square will pursue that are designed to solve several issues inherent in the DST structure. The tax rules governing DSTs require a sale when the mortgage matures and does not permit recapitalizing or refinancing, even when in the best interests of the investors. Many investors would prefer to hold their best investment properties long-term, but the tax rules mandate a sale. The UPREIT structure is conducive to our long-term investment philosophy by affording DST investors the option to retain their best properties long-term with no current taxation, while the REIT adds capital to increase rents and maximize value.”

According to Rogers, the DST structure does not allow for refinancing or recapitalization, forcing the sale of a property as the loan matures. By performing an UPREIT transaction, investors can maintain ownership of their property and realize the structural benefits that a REIT can provide, such as greater cashflow, increased efficiency and economies of scale, transparency, audited financials and governance by an independent board of directors.

Since its founding in 2012, Capital Square has completed more than $7.5 billion in transaction volume.

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