Fortress Launches 1031 Fund Targeting Senior, Student Housing
Fortress Investment Group is giving baby boomers the opportunity to invest in the senior living sector, where they're fueling massive growth, through a new 1031 exchange fund.
The New York-based alternative asset investment giant launched Fortress Real Estate Exchange, a fund leveraging Delaware Statutory Trusts, or DSTs, to give investors access to institutional-grade assets with the tax benefits that come through a 1031 exchange.
The platform is initially targeting senior housing, student housing and multifamily properties and will be structured to provide exit flexibility by avoiding an umbrella partnership REIT, or UPREIT, structure that can limit liquidity through lockups or share conversion constraints.
Leadership at Fortress, which has $54B in assets under management, is looking to tap into the pool of baby boomers who want to downsize or otherwise reallocate their portfolios away from assets they maintain or manage.
David Hammerman, the chief operating officer of real estate equity at Fortress, said in a statement the baby boom generation had $90T in net worth, with as much as $4T concentrated in investment properties and second homes.
Leveraging DSTs and 1031 exchanges offers “an effective solution to transition from active ownership of smaller-scale assets to fractional, passive ownership of institutional-quality real estate on a tax-deferred basis,” he said.
DSTs have exploded in popularity and account for roughly 95% of the equity in the securitized 1031 market, which attracted $21.6B in equity investments between 2021 and 2023 compared to $9.2B from 2017 to 2020.
A 1031 exchange requires a like-kind investment: Real estate has to be swapped for another piece of real estate to unlock tax deferrals. But tax authorities said in 2004 that DSTs counted as like-kind replacements, giving sellers the ability to invest in a piece of a property and still enjoy 1031 tax benefits.
The Fortress fund, and others like it, allow a couple downsizing from a large home into a condo to invest the proceeds from the home sale into a billion-dollar office tower or other institutional-grade asset.
Nuveen launched its own 1031-focused fund in May that leverages the UPREIT process to convert sales proceeds into shares of the Global Cities Real Estate Investment Trust without having to pay taxes on the sale.
Proponents of the tax code quirk say it is a popular way to boost reinvestment in real assets, while detractors deride it as a loophole. Billionaire and onetime Republican presidential candidate Mitt Romney called for an end to the 1031 exchange program to help raise tax dollars to support Social Security in a December op-ed for The New York Times.
