Firm Unlocks Investable Capital, Expands Portfolio Through 1031 Exchange

By Jon Leckie
CoStar News

May 23, 2024 | 3:00 P.M.

Multifamily investment and management firm Bonaventure has sold a partial ownership stake in a luxury multifamily property to fund the purchase of a project in need of upgrades through a tax-advantaged transaction as disruptions in traditional financing have dragged down sales volume across the sector.

The dual deal centers on Bonaventure’s sale of a roughly $18 million equity position in Attain Downtown, a 156-unit Class A multifamily property in Norfolk, Virginia. Proceeds from the sale were then used to purchase Cavalier Crossing, a 144-unit garden-style apartment complex in Charlottesville, Virginia, that will also undergo a comprehensive renovation to update unit interiors and amenities at the property that debuted in 2003.

“The acquisition of Cavalier Crossing aligns perfectly with our current acquisition strategy of identifying undervalued assets in growth markets that offer significant potential for value creation,” Dwight Dunton, Bonaventure’s founder and chief executive, said in a statement.

The transactions were completed on behalf of the Bonaventure Multifamily Income Trust, the company’s perpetual life multifamily investment fund, and utilized the tax advantages available through a so-called 1031 exchange. Named for a section of the U.S. tax code, a 1031 exchange allows the property’s seller to defer capital gains taxes by quickly reinvesting those funds in other real estate assets.

Under the terms of the partial sale of Attain Downtown, Bonaventure will maintain a majority stake in the property and continue to oversee its operations. The deal was structured as a tenancy-in-common transaction, allowing multiple investors to own undivided interest in a single property while deferring capital gains taxes through a 1031 exchange, according to the company.

The purchase of Cavalier Crossing was also completed through a 1031 exchange, deferring capital gains taxes on the proceeds from the partial sale of Attain Downtown.

“This transaction represents one of the many customized solutions we can offer our clients to solve their 1031 exchange needs, while also helping us grow strategic new partnerships,” Dunton said.

Bonaventure originally purchased Attain Downtown for $29.3 million in January 2019 from Marathon Development Group, according to CoStar data. Cavalier Crossing was last purchased by apartment giant Greystar in a six-property portfolio deal completed in August 2021.

Low Investment Activity

The current combined transaction is part of a tactic being employed by Bonaventure to extract capital from stable assets and redeploying those funds into value-add opportunities that offer the potential for greater risk-adjusted returns, the company said, and comes at a time when multifamily investment volume has been depressed.

According to the brokerage CBRE, just $19.8 billion in transaction activity occurred in the first quarter, down 28% from the final quarter of 2023 and the lowest level since the second quarter of 2020.

Reasons for the limited activity range from the increased cost of capital due to stubbornly high interest rates that have been a primary factor in maintaining distance between what pricing terms sellers and buyers expect. This has left many of the largest publicly traded apartment owners on the sidelines, including Mid-Atlantic Apartment Communities, AvalonBay and Equity Residential, which registered zero acquisition activity in the first quarter, even as the industry sits on what Mark Parrell, Equity’s CEO, said was more than $200 billion ready to invest in apartments.

“There’s a gap between both bid and ask, as well as a shortage of capital in this part of the cycle,” Dunton told CoStar News about the reasons for the slowdown in transactions. “What we were able to accomplish was unlocking some capital by solving with someone who was a tax-motivated investor. We then were able to redeploy that capital in a somewhat distressed situation where we were able to meet the current owner’s sales expectation.”

The Bonaventure Multifamily Income Trust currently has 3,790 units across its 20-property portfolio and over $1 billion in assets under management. The fund is focused on opportunities generated by a systemic housing shortage and positive migration trends in the Southeast.