Investors are putting millions into a fancy student dormitory. They say they were scammed.


Ms Martinez, who lives not far from the dorm, said she invested just over $ 100,000 in the transaction – money from the sale of a rental property. Like many investors in Skyloft, she was looking for a way to defer payment of capital gains on the previous sale, and the private placement was marketed by brokers as a “1031 swap” transaction that would keep Internal Revenue on board. Remote service.

A 1031 swap transaction, named after a section of the Federal Tax Code, allows an investor to defer payment of capital gains on the sale of a property as long as the proceeds are invested in another valuable property. equal to or greater than that sold. These deals are often criticized as a tax break for the wealthy, but the deals have also long attracted the interest of more moderate investors.

The Biden administration plans to scrap many of these agreements in order to generate additional revenue to pay for increased spending on child care and family leave programs. The Biden plan would allow 1031 exchanges to continue for most investors looking to defer up to $ 500,000 in capital gains – many in the Skyloft deal fit this bill.

In recent years, student housing projects like Skyloft have become particularly attractive real estate investments – especially as universities have encouraged the construction of luxury apartment buildings to accommodate students from wealthy families. Before the pandemic, there were an average of $ 7 billion in student housing deals in the United States each year. That amount was $ 3 billion just a decade ago, according to CBRE, a commercial real estate services company.

Court documents and interviews with investors explain how funding for the Skyloft project worked. To secure the $ 124 million Skyloft purchase, Nelson Partners secured a $ 66 million mortgage from a group of lenders led by UBS, in addition to the $ 75 million raised from ordinary investors. He also secured $ 35 million in short-term funding from Axonic Capital, a New York-based hedge fund specializing in commercial real estate transactions. The Axonic loan was used to finalize the purchase while Nelson Partners raised funds from investors.

Nelson Partners was to repay Axonic the bridging loan, plus interest, using money raised from investors like Ms. Martinez. But Mr Nelson’s company did not repay the loan, according to documents filed by the court. In February 2020, Axonic warned Nelson Partners and informed him last May that it was declaring Nelson Partners in default and taking control of the building.

Mr Nelson opposed Axonic’s move but did not tell investors about his dealings with the hedge fund, the lawsuits said. Instead, in April 2020, Nelson Partners stopped paying monthly cash dividends to investors, telling them he had to keep money during the pandemic in case students and their parents stop paying rent. . Mr. Nelson’s company also received a loan of just over $ 1.2 million from the Small Business Administration’s Paycheck Protection Program.

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