Capital Square Completes Delaware Statutory Trust (DST) to UPREIT Transaction with Over 85% DST Investor Participation and 161% Total Return¹

April 3, 2023 | Capital Square

Capital Square, one of the nation’s leading sponsors of tax-advantaged real estate investments and an active developer of multifamily communities, announced today the successful UPREIT transaction for Saltmeadow Bay Apartments, a Class A, 229-unit multifamily community in Virginia Beach, located less than one mile from the Virginia Beach boardwalk. In the UPREIT transaction, over 85% of the DST investors (by value) exchanged their DST 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 DST/Section 1031 exchange program. As a result of the $72 million UPREIT transaction, the DST investors realized an approximately 161% total return.¹

“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 uniquely afforded its 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, all investors were treated equally, with identical fee structures and receipt of the same fair market value purchase price based on MAI appraisals.

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 with a favorable interest rate 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.”²

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.”

Since its founding in 2012, Capital Square has acquired 170 real estate assets for over 6,000 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.

About Capital Square

Capital Square is a vertically integrated national real estate firm specializing in tax-advantaged real estate investments, including Delaware statutory trusts for Section 1031 exchanges, qualified opportunity zone funds for tax deferral and exclusion and a real estate investment trust (REIT). In recent years the company has become an active developer of mixed-use multifamily properties in the southeastern U.S., with eight current projects totaling approximately 2,000 apartment units with a total development cost in excess of $600 million. Since 2012, Capital Square has completed more than $7.5 billion in transaction volume. Capital Square’s related entities provide a range of services, including due diligence, acquisition, loan sourcing, property/asset management and disposition, for a growing number of high-net-worth investors, private equity firms, family offices and institutional investors. Since 2017, Capital Square has been recognized by Inc. 5000 as one of the fastest growing companies in the nation for six consecutive years. In 2017, 2018 and 2020, the company was also ranked on Richmond BizSense’s list of fastest growing companies. Additionally, Capital Square was listed by Virginia Business on their “Best Places to Work in Virginia” report in 2019 and their “Fantastic 50” reports in 2019 and 2020. In 2023, Capital Square was recognized by the Richmond Times-Dispatch as one of the region’s “Top Work Places.” To learn more, visit www.CapitalSq.com.

Disclaimer: Securities offered through WealthForge Securities, LLC, Member FINRA/SIPC. Capital Square and WealthForge Securities, LLC are separate entities. There are material risks associated with investing in DST properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to see any securities. Please read the Private Placement Memorandum (PPM) in its entirety, paying careful attention to the risk section prior to investing. Diversification does not guarantee profits or protect against losses. Private placements are speculative.

1. The “total return” represents the ratio of total sales proceeds and distributions through the life of the asset over the total initial equity invested. The “annualized return” is defined as the difference between net sale proceeds and initial investment, plus the distributions over the holding period, divided by the initial investment; divided by the number of months; times 12. The ROE and annualized return are net of fees and represent a return to an individual investor. No representation is made that any investment will or is likely to achieve profits or losses similar to those achieved in the past or that losses will not be incurred.

2. Distributions are estimated based on historical operations of the DST and the REIT. Future distribution declarations of the REIT (and therefore the OP) are at the discretion of the REIT’s board of directors and are not guaranteed.

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