Henrico-based Capital Square 1031 on a ‘growth spurt’ as boomers seek tax-deferred real estate investments

April 27, 2018

Louis J. Rogers was fresh out of law school in 1984 and just starting with the law firm Hunton & Williams in Richmond when he got an assignment that turned out to shape his career.

A client who owned a hotel was looking for ways to sell it without getting hit with a big tax bill. Rogers was tasked with finding a solution. He recalls hunkering down in a research room on an early Lexis computer terminal.

“Three days later, I emerged with an answer,” Rogers recalled recently in his Henrico County office of Capital Square 1031, the real estate investment and management company he founded in 2012.

The answer was in a part of the federal tax code dating from 1921 that deals with what is commonly referred to as a 1031 exchange under Section 1031 of the Internal Revenue Code. Section 1031 allows a real estate investor to sell a property and defer the capital gains taxes by reinvesting the proceeds into “like kind” property, essentially swapping one investment property for another one.

At the time, 1031 exchanges were largely “uncharted,” Rogers said, but he found that the client could indeed do a 1031 exchange of the hotel for an apartment building as a “like kind” property.

That was Rogers’ first time setting up a 1031 exchange.

“It was the spring of 1984, and I haven’t stopped doing exchanges since,” said Rogers, 61, who has been recognized by one real estate industry publication as “a pioneer in the securitized, tax-deferred exchange business.”

These 1031 exchanges also have grown in popularity, thanks largely to a 1979 federal court ruling that held the like-kind exchanges of property do not have to be simultaneous, but can be delayed exchanges. Now, about 30 percent of annual transactions in the $10 trillion U.S. commercial real estate market are 1031 exchanges, Rogers said.

In 2012, Rogers founded Capital Square 1031 as a “sponsor company” that serves as an intermediary for people looking to do 1031 exchanges.

Capital Square provides due diligence, acquisition, loan sourcing, property management/asset management and disposition for high net worth investors, private equity firms, family offices and institutional investors.

Based in the Innsbrook Corporate Center in Henrico County, the company scours the country for good investment properties — typically either apartments or commercial office buildings — and acquires them for accredited investors who take part in 1031 exchanges under a Delaware Statutory Trust, or DST, structure. Under that structure, individual investors can hold fractional interest in large commercial properties along with other investors.

“We are in a pretty big growth spurt,” Rogers said of the company, which has grown to hold and manage more than $650 million worth of real estate assets nationwide, a number that could reach $1 billion sometime in 2019, after some pending deals close.

After starting with a staff of three, including Rogers, the company now employs 30 people and has been hiring, while expanding its office space just off Nuckols Road.

Last year, Capital Square was one of 30 companies based in the Richmond region that made the Inc. 5000 list of the nation’s fastest-growing private businesses. The company was ranked No. 485 on the list, with a three-year growth rate of 925 percent and annual revenue of $42.7 million.

“We have grown from zero to 1,700 investors,” Rogers said. The company has 59 properties, with other acquisitions in the works.

The increase in investors — those who participate in the company’s 1031 exchange program — has been driven by demographics, Rogers said. “The aging baby boomers want to invest in real estate, and they are looking for a tax-advantaged way that allows them to buy better property without having to actually manage the property,” he said.

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Properties held by Capital Square 1031 in the Richmond region include two apartment complexes — Perry Place and Maple Springs Apartments — and medical offices such as Pulmonary Associates in Mechanicsville and BetterMed Urgent Care in Ashland.

Four years ago, the company bought the Virginia Women’s Center medical office building in Mechanicsville. “It is a beautiful building, and a very strong practice with good doctors,” Rogers said.

One of Capital Square 1031’s main investment targets is health care facilities. For instance, it is expecting to close soon on a portfolio of nine dialysis centers.

“Health care is in high demand,” said Michael S. Waddell, the company’s executive vice president of asset administration. “The baby boomers will need health care, and health care still needs facilities to house all the different businesses — medical practices, hospitals and urgent care centers.”

The company also likes to invest in multitenant housing such as apartment buildings, because the loss of any one tenant does not harm the value of the property.

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