The market for 1031 like-kind exchanges remains highly active—as a recent multimillion dollar transaction in Georgia clearly demonstrates.
In early March, Bluerock Value Exchange announced the sale of Venue Big Creek, a 372-unit apartment community in Alpharetta, Ga., just outside Atlanta. The property was acquired by BR Big Creek, DST, a Delaware Statutory Trust (DST) structured for 1031 like-kind exchanges for accredited investors.
In a news release, Bluerock noted that it had syndicated the investment property for approximately $84.5 million in December 2016 and sold it for $100.3 million in February 2021, a 144 percent net total return on equity investment, inclusive of distributions, and an 11 percent internal rate of return.
In addition, the full-cycle event included an equity return of approximately $43.5 million on a $35.9 million investment, or an approximate 121 percent net gain on sale, Bluerock said. In addition to the capital appreciation, the property paid monthly distributions of between 5.35 percent to 5.44 percent, totaling more than $8.1 million and enhancing the net total return to 144 percent.
Under Section 1031 of the U.S. tax code, investors may defer capital gains taxes by using profits on the sale of an investment property to buy another similar property. Many investors deploy Section 1031 benefits with a Delaware Statutory Trust, which allows an investor to buy a fractional interest in commercial real estate and capitalize on income from the property, appreciation and any other tax benefits that may occur.
Commercial real estate owners often use 1031 DSTs to capture the benefits of a tax-advantaged investment without the burden of actually maintaining a property. Under IRS rules, investors have no voice in the active management of the trust’s property. Management falls to the trust itself, which usually turns over day-to-day responsibilities to a master leaseholder or property manager.
DSTs can allow smaller commercial real estate owners a chance to trade in their holdings to buy into large-scale investments that were once available only to institutional investors. This also allows smaller investors to potentially diversify their portfolio across asset types or geographic focus.
For financial institutions lending to commercial real estate investors, DSTs are useful because of their status as a separate legal entity and the stability they bring to the real estate investment structure. Unlike a tenancy-in-common, where multiple property owners might be listed on a loan, the DST itself is the borrower, and only the signatory trustee is authorized to act on behalf of the DST with a secured lender. Signatory trustees are not on annual contract and tend to remain the lender’s sole contact for the life of a loan. And a separate Delaware trustee is required, helping prevent the trust from inadvertently terminating or undertaking an action that could jeopardize its preferential tax treatment.
Kaplan Voekler Cunningham & Frank is deeply engaged in all facets 1031 DST law , and works closely with developers and owners, private equity funds, government agencies, investment banks, and other institutions on DST law -related issues. To learn more about how we can help, contact us for a consultation.