JLL Subsidiary Debuts 1031 Exchange Fund With Atlanta-Area Buy

The investment subsidiary of brokerage giant JLL is making its first foray into the 1031 exchange world with a multifamily property in Metro Atlanta.

JLL Income Property Trust, a real estate investment trust managed by JLL offshoot LaSalle Investment Management, has launched a like-kind exchange fund aimed at high net worth investors who don't want to actively manage the day-to-day operations of real estate, but want to benefit from the tax shelter that like-kind exchanges provide.

“Historically, investors were not able to use our shares for like-kind exchanges,” JLL Income Property Trust CEO Allan Swaringen told Bisnow. “We're targeting what we feel is an underserved market.”

Like-kind exchanges, also called 1031 exchanges, allow real estate investors to sell one asset, such as a warehouse or office building, and buy a similar asset within 180 days. In doing so, those investors can avoid paying capital gains taxes to the IRS.

JLL Income Property Trust’s 1031 platform is set up as a Delaware Statutory Trust, a vehicle that allows the operator to pool capital from individual investors to buy properties while granting those investors capital gains tax deferment. Its first purchase was the Reserve at Johns Creek Walk, a 210-unit, Class-A apartment complex in the affluent Metro Atlanta suburb of Johns Creek, 27 miles north of Downtown Atlanta.

Swaringen said the $25M price tag for the property was paid for by 20 individual investors in the first DST, each contributing a minimum of $500K. The complex was purchased from the IPT fund, which owns more than $3B in commercial real estate properties across the country, a third of which are multifamily.

Drew Dornbusch, who heads the 1031 exchange platform for LaSalle Investment Management, said the new fund's investment criteria will hew closely to IPT's targets: stabilized, Class-A commercial assets that promise a steady return for investors. 

“These are investors who have managed their real estate ... but when it comes to selling, they're looking for a tax deferment,” he said. “This is capital that otherwise wouldn't come into IPT.”

DSTs are often attractive to 1031 investors who, upon selling properties, are unable to funnel all the proceeds from a sale into another property for the tax shield benefits. A DST allows those investors to take the remaining amounts and invest in like-kind real estate for those tax benefits, experts say.

Funds like these are especially attractive to baby boomer investors, those who like a steady, predictable cash flow without having to pay capital gains tax or be bothered with the day-to-day management of the real estate, said Greenberg Glusker Fields Claman & Machtinger partner Warren “Skip” Kessler, a veteran real estate attorney who specializes in representing 1031 exchanges.

“I sit in these meetings and the investors, they only want to know if they're going to get their check every quarter, and if it's going to get better and better,” Kessler said. “[Investors] don't care if it’s the GM Building in New York or some rundown building in a small town.”

The like-kind exchange market has grown over the past few years, albeit in fits and starts. In 2002, like-kind exchange operators had more than $356M invested in real estate, according to a 2018 report issued by Mountain Dell Consulting and obtained by Bisnow. By 2018, the 1031 exchange market had swelled to nearly $2.5B. The market peaked in 2006 at $3.6B, but dipped to $169M in 2010 after the nadir of the Great Recession.

Current data is difficult to come by, experts say, but Mountain Dell predicts that the market invested a total of $3B by the end of 2019.

The DST market also has diversified on the types of properties it has invested in in recent years, including into student and senior housing, Federation of Exchange Accommodators Chairman Scott Saunders said. Saunders also is a senior vice president with 1031 exchange platform Asset Preservation Inc.

Overall real estate performance since the recession has been a big draw for investors into the market as well, Saunders said, especially as investors sell properties at returns that have outpaced the public markets.

“We've had very strong appreciation in the commercial markets for 10 years,” he said. “If they don't do an exchange, they're going to pay a whole lot in taxes.”

Even with the impact the pandemic has had on the commercial real estate investment market as a whole, Swaringen said the pipeline of investor interest in 1031 exchanges remains buoyant.

“We are still very bullish on this program, even in a post-COVID-19 market,” he said. “The smaller transaction activity, which is generating the need for these like-kind exchanges, is still very much active.”

CORRECTION, JUNE 25, 2020 AT 4:35 P.M. E.T.: JLL Income Property Trust owns more than $3B in commercial real estate and targets high-net-worth investors. A previous version understated the amount owned and the type of investor. The story has been updated.