CoStar News
Global real estate developer Hines has launched an initiative to open up some of its assets to investors seeking to shelter capital gains from federal taxes as some of those types of property sales are on pace for a record year.
Hines Real Estate Exchange is designed to aid qualified investors interested in tax-advantaged investment opportunities. The service intends to make 1031 exchange opportunities, named for Section 1031 of the U.S. tax code, available to investors in the form of interests in Delaware Statutory Trusts, or DSTs.
The exchange’s likely first deal offers investors a tax break if they park their money in a Houston office building.
The 1031 provision allows investors to sell a property held for business or investment purposes and swap it into a new property of similar type. In doing so, the federal tax on capital gains is deferred for as long as the investor holds on to the new property. By using DSTs, multiple investors’ sales proceeds can be pooled into larger, institutional-grade properties and still benefit from the 1031 deferral.
Such sales rose to a record last year of $38.49 billion, according to CoStar data, just surpassing a slightly smaller volume in 2019. The quarterly total of 1031 sales in the first two quarters of this year was higher than in the same quarters last year.
“Hines Real Estate Exchange is a natural progression for the firm,” Alfonso Munk, chief investment officer of the Americas and president of Hines Global Income Trust, said in a statement. “Given the strong market demand for 1031 exchange products and Hines’ vast experience and expertise as sponsor of [Hines Global Income], we believe the time is right to launch this initiative.”
Hines is sourcing 1031 opportunities from acquisitions completed by Hines Global Income Trust.
The average sale price per square foot of 1031 exchanges has been climbing steadily, rising 20% from a low of $177 in 2017 to $213 last year, according to CoStar data. Average prices this year have been even higher: $258 per square foot — an increase of nearly 11% over last year.
Investors are eager to capitalize on the higher pricing they have received on their recent sales, according to Mark Earley, CEO of Hines Securities. But the competition for a replacement deal is making it harder to reinvest those proceeds.
“When a property is sold, the seller has a finite amount of time to identify and qualify for a 1031 opportunity in order to defer the capital gains tax on the sale," Earley added. "There is a lot of capital pursuing opportunities, which can make it a challenge for an individual to successfully find an ideal asset in which to roll their funds, so relying on seasoned [real estate] professionals like Hines is key.”
The capital raising is so strong among DSTs that it’s drawing attention from other major companies. In January, commercial real estate finance powerhouse Greystone took a minority stake in Passco Cos., regularly one of the five firms that most actively offer DST securities to investors.
Atlanta-based private equity firm Peachtree Group also launched a DST program this year targeting the hospitality sector.
Earley told CoStar he could not discuss the specifics of any DST offerings Hines has in the works.
The first shot at acquiring Hines DST shares is through 200 Park Place, a 207,000-square-foot office building in Houston that Hines Global Income acquired in July for $145 million.
Hines filed a registration statement for the DST offering with the Securities and Exchange Commission this week. HGIT 200 Park Place DST is looking to raise $15.8 million from investors with a minimum investment of $250,000.
Hines has been in the individual investment space since 2004, primarily offering nontraded REITs such as Hines Global Income Trust, Earley said.
“In recent years, Hines has expanded its investment solutions offered to individual investors, offering a suite of diverse investment strategies to meet various investor needs,” he said. Hines Real Estate Exchange “is the most recent example of that.”
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