Starwood REIT Launches 1031 Exchange Program

Starwood Real Estate Income Trust Inc, a perpetual-life monthly NAV REIT sponsored by private investment firm Starwood Capital Group, are launching a 1031 exchange program designed to provide accredited investors with the opportunity to defer taxes on gains from the sale of appreciated real estate property.

Through its operating partnership, The Starwood REIT DST program will issue and sell up to $1 billion of beneficial interests in specific Delaware statutory trusts holding at least one real property sourced from Starwood REIT’s real properties or from a third party.

Each property will be held in a Delaware Statutory Trust and leased back by a wholly owned subsidiary of the operating partnership, in accordance with a master lease agreement. Under each master lease agreement, the operating partnership will retain a fair market value purchase option giving it the right to acquire the DST interests from the investors any time after two years from the closing of the applicable DST offering in exchange for operating partnership units or cash.

After a one-year holding period, investors who acquire OP units generally have the right to redeem all or a portion of their OP units for, at Starwood REIT’s sole discretion, shares of common stock, cash, or a combination of both.

All material management authority for each DST will be exercised by a subsidiary of Starwood Capital, which will primarily manage the DSTs’ limited investment activities, handle administrative actions, and generally determine when it is appropriate for a DST to sell a property.

According to a recent filing, Starwood REIT expects that the DST Program will provide the opportunity to expand and diversify its capital-raising strategies by offering a potentially attractive investment product for investors who may be seeking like-kind replacement properties to complete tax-deferred exchange transactions under Section 1031 of the Code.

Section 1031 of the Internal Revenue Code allows investors to defer paying capital gains taxes on investment property sales by reinvesting the proceeds into a similar investment property within a specified time frame. Securitized 1031 exchange programs are structured as securities and sold to retail investors. DSTs are currently the industry favorite, as tenant-in-common exchanges that were popular in the mid-2000s have since fallen out of favor. As previously reported by The DI Wire, DST fundraising is on track to raise $5 billion in 2023.

Starwood REIT was launched in 2018 with “the mission of bringing a differentiated real estate investment solution to a wider group of investors.” Starwood intends to use the net offering proceeds from its DST Program to make investments, reduce borrowings, repay indebtedness, fund the repurchase of shares under its share repurchase plan, and other corporate purposes.

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