Life Sciences: LSRE is attracting more 1031 exchange investors

The head of JLL Income Property Trust talks with BREI about this trend

By Murray W. Wolf

As most commercial real estate (CRE) investors have long been aware, 1031 exchanges and Delaware Statutory Trusts (DSTs) offer several advantages, including tax deferrals, diversification, opportunities for fractional ownership and more. But the interest in using those tools for life sciences real estate (LSRE) investing appears to be on the rise.

■ On Tuesday (Sept. 12), Chicago-based JLL Income Property Trust Inc., an institutionally-managed, non-traded real estate investment trust (REIT), announced that it has fully subscribed its first life sciences DST.

■ Also on Tuesday, Dallas-based NexPoint Advisors LP, a multi-billion dollar alternative investment platform, announced that it has made an initial investment in its second life sciences DST. (For more information about the NexPoint transaction, please see the news item that follows this article.)

Details about the JLL IPT deal

In its announcement, JLL Income Property Trust said, “The $90 million, two-property life sciences portfolio, located in Fremont, Calif., was structured as a (DST) designed to provide 1031 exchange investors the opportunity to reinvest proceeds from the sale of appreciated real estate, while also deferring taxes, maintaining their allocation to real estate and enjoying the opportunity to realize long-term appreciation in a tax efficient manner.”

Limited liability companies affiliated with JLL Income Property Trust acquired the two Fremont properties exactly one year ago today (Sept. 16, 2022) for a total of $80.5 million, according to RevistaLab data, which indicates that they comprise an 87,953 square foot building at 6500 Kaiser Drive and a 43,560 square foot facility at 6300 Dumbarton Circle.

“We are pleased to have fully subscribed JLLX Ardenwood DST,” Drew Dornbusch, head of JLL Exchange, said in Tuesday’s news release. “We continue to see strong demand from 1031 exchange investors and their financial advisors, as demonstrated by the successful syndication of this $90 million offering.”

Allan Swaringen, director, president and CEO of JLL Income Property Trust, added, “Life science properties in the Bay Area are among the strongest performing in the medical/healthcare sector, with demand significantly outpacing supply. With a weighted average lease term (WALT) of more than six years, the Ardenwood properties provide our investors a durable stream of income from Class A real estate leased to strong, creditworthy tenants.

“Wealth management firms and their property owner clients who participated in the JLLX Ardenwood, DST offering recognized the high-quality real estate, the benefits of our institutional management, and the investor-friendly structure of our JLL Exchange platform.”

JLL Income Property Trust owns and manages a diversified portfolio of industrial, office, residential, retail and other properties in the United States. A daily net asset value (NAV) REIT with $7 billion in portfolio assets, it is sponsored by Jones Lang LaSalle Inc. (NYSE: JLL) and LaSalle Investment Management Inc., and as of June 30 owned interests in 137 properties and more than 4,400 single-family rental houses in 27 states.

Since launching the program in 2020, JLL Exchange has provided investors with more than $1 billion of like-kind exchange interests through 19 DST offerings to property owners seeking to reinvest proceeds from their sale of appreciated investment real estate in a tax-efficient manner. JLL Income Property Trust has completed nine full-cycle 721 Exchange, or UPREIT, transactions totaling more than $680 million to date.

Our interview with Allan Swaringen

To learn more about the growing use of 1031 exchanges and DSTs in the LSRE space, BREI followed up with Mr. Swaringen, the head of JLL Income Property Trust. Here is a transcript of that conversation.

BREI: Allan, thanks so much for taking the time to chat with us. We seem to be seeing a growing number of life sciences real estate DSTs specifically designed to facilitate 1031s. Was JLLX Ardenwood DST a first for your firm, or do you have other platforms of this kind? Is it common in the industry?

Swaringen: All of the properties we add to our portfolio are acquired with the purpose of being accretive to our investors, regardless of whether they enter our 1031 platform or not. We’ve long had conviction in the medical office and life sciences sector given the positive demographic tailwinds and stickiness of tenants in the sector.

Through our discussions with advisers, we’ve heard that private client investors are looking for a tax-efficient way to reinvest the proceeds of their realized gains on appreciated real estate. What’s clear is that there are private client investors with appetite for putting money to work in institutional quality properties, including medical office and life sciences. While this is our first life sciences DST, we anticipate that there will be continued appetite for opportunities such as this.

BREI: What are the advantages for the investors in this type of platform? Is there anything about life sciences assets that make them particularly well suited for this approach? Or to ask the question another way, what motivated JLL IPT to create this platform?

Swaringen: Participants in a 1031 exchange program enjoy a wide range of benefits, including the opportunity to reinvest proceeds from the sale of appreciated real estate on a tax-deferred basis while maintaining their allocation to real estate, and the opportunity to realize long-term appreciation in a tax efficient manner. There has been significant appetite for a 1031 program from advisers and their clients for some time, which is why we launched JLL Exchange in 2020.

In terms of the sector selection, we have utilized the DST structure for 1031 exchange transactions across multifamily, grocery-anchored retail, industrial and now life sciences. Life sciences in particular are a stable, income-producing sector, typically with long-term tenants. Those qualities, combined with the institutional management of them, made this an attractive opportunity for private client investors.

BREI: How many and what type of investors (institutions, high-net-worth individuals, etc.) does JLLX Ardenwood DST have? What’s the minimum investment?

Swaringen: While we don’t disclose details around our investor base, we experienced significant demand from high-net-worth and ultra-high-net-worth property owners and the financial advisor clients who represent them. The minimum investment in JLLX Ardenwood DST was $500,000.

BREI: More broadly, what’s your take on the current life sciences real estate investment market? What do you anticipate in the next 12-24 months?

Swaringen: Life sciences continue to be a strong performing property type even amid a more challenging real estate environment and a slowdown in venture capital funding for life science and biotech companies. There remains appetite for space that can accommodate the specifications required by tenants of these properties, and tenants often invest heavily in their spaces, which provides fertile ground for long-term leases.

Trades of properties have slowed down across the entire real estate landscape, but we feel that given the long-term nature of the leases and limited supply of life sciences properties, there will continue to be demand for Class A properties, and that they will remain cash flowing assets.

News Release: JLL Income Property Trust Fully Subscribes $90 Million Life Sciences DST