REIT Uses 721 Exchanges to Acquire Shopping Center Portfolio

A Texas-based REIT is utilizing 721 exchanges to acquire a portfolio of 17 unanchored shopping centers in El Paso.

Houston-based KM Realty, a REIT that specializes in unanchored retail centers in Texas, New Mexico and Arizona, is acquiring 17 properties encompassing more than 500K SF in total from El Paso-based Cavalier Property Management for an undisclosed price.

The acquisition expands KM Realty’s holdings to 76 properties, Randy Keith, KM Realty managing principal, told El Paso Inc. The company, which has 57 assets in Houston, has been growing its portfolio by targeting for acquisition unanchored shopping centers.

Keith told the publication that KM Realty is focusing on unanchored retail centers because of a lack of public or private REITs for that size of asset. Unanchored shopping centers usually are smaller and family owned, attracting less interest from institutional investors than anchored retail centers.

“We’re adding portfolios to aggregate up to a mass. It’s highly fragmented. There are many owners of retail centers across the country and [in] every city. It’s an asset class that hasn’t been aggregated at all,” Keith told El Paso Inc.

“When the markets are right, there will be a good opportunity to take a REIT public that has a sufficient number of assets,” Keith added. “We really believe you can grow once you’re publicly traded.”

KM Realty specializes in 721 exchanges, also known as UPREIT. An UPREIT is similar to a 1031 exchange, allowing an investor to defer capital gains taxes, relinquishing control of a property in exchange for equity in a REIT.

In this case, the 721 exchange allows Cavalier to roll its property into a KM Realty Trust Operating Partnership in exchange for operating partnership units. KM Realty Investment Trust is the general partner of the operating partnership, issuing the partnership units.

The trade is not subject to transfer taxes that would be assessed for a traditional sale. Cavalier’s owners, Randy Wechter and Kevin Wechter, will get equity in the KM Realty REIT; Kevin Wechter will join the REIT’s board.

The El Paso retail assets acquired by KM Realty from Cavalier include the Towne East Shopping Center, which totals about 60K SF at 1188 North Yarbrough; Century Plaza, a 42K SF shopping center at 5857 North Mesa; and Colony Cove III, encompassing about 36K SF at 7200-7250 North Mesa.

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