Thompson National Properties LLC announced the acquisition of The Reserve Apartments, a community of 158 townhouse apartments in Evansville, Ind., on September 5.
The luxury apartment complex is owned by a Delaware Statutory Trust, a tax-deferred ownership structure that, in the case of The Reserve, allows more than 40 real estate investors to share ownership in a single property.
The DST ownership structure is designed to work as part of a Sec. 1031 exchange. The exchange allows investors who sell real estate assets to defer capital gains tax on the sale by immediately reinvesting the proceeds in other real estate properties. A DST structure allows investors to buy just as much real estate as they need for the 1031 exchange. For example, an investor who has owned and managed a two-unit apartment building could sell that property and defer paying any capital gains on the sale by investing an equal dollar amount in a DST, says Louis Rogers, Thompson’s managing director of private programs.
DSTs provide “maximum flexibility,” according to a description of the DST structure by the law firm of Richard Layton & Finger, based in Wilmington, Del. “Parties using Delaware Statutory Trusts enjoy the benefits of Delaware’s courts, which are experienced in resolving business disputes, and the benefits of Delaware’s legislature and administration, which are renowned for their positive attitude toward business and innovation.”
DST deals fill in the gap left behind by the Tenant-In-Common ownership structure that crashed and burned in the real estate collapse. The bankruptcy courts are still untangling TIC deals that became over-leveraged after prices fell. Single investors still use TICs to split their investments in real estate into a right size for 1031 exchanges—but new TICs owned by multiple investors are much less common, according to Ben Thypin, director of market analysis for Real Capital Analytics.
The debt on The Reserve seems fairly manageable—there is a Fannie Mae mortgage with a fixed 3.9 percent interest rate amortized over 30 years with a balloon payment at the end of its 10-year term. The loan only covers 55 percent of the value of the property, according to Thompson. That leaves a lot of room to refinance the property in 10 years, even if prices for apartment properties fall or interest rates rise sharply.
Thompson, as the sponsor of the DST, will manage The Reserve Apartments under a master lease.
Class-A apartment community
The Reserve Apartments was built as a luxury community of for-sale townhouses in phases between 2008 and 2010. As the housing market collapsed, the property was repurposed as a community of luxury rental apartments and is now 94 percent occupied, according to Rogers. The homes include 9-ft. ceilings or even vaulted 14-ft. ceilings, along with flashy finishes such as hardwood ﬂoors and granite countertops. The 7.55-acre site includes a swimming pool, fitness center and a billiards room.
Thompson plans to hold The Reserve for five to seven years on behalf of the DST before selling. The company expected modest appreciation for the property. “It is not designed to be a value-added, turnaround type of deal,” says Rogers. Rents currently start $760 a month for a 763-sq.-ft., one-bedroom homes and rise to $1,774 for a 2,114-sq.-ft., three-bedroom townhome, according to local real estate listings.
Evansville, a city of 100,000 people on the banks of the Ohio River, is a long way from the handful of coastal cities that attract the highest prices for apartment properties. However, Evansville has a strong, diverse employment base, including a Toyota plant with 5,000 employees, hospitals and two universities. There is very little new apartment construction planned or recently completed in the apartment market, according to Thompson.
Since the financial crash in late 2008, Thompson has sponsored 10 DST structures on behalf of exchange investors “as well as cash investors,” according to the company. “The DST programs are designed to satisfy investor demand for both stable cash ﬂow and growth," says Rogers.