Fortress Launches 1031 Exchange Fund

Fortress Investment Group launched a 1031 exchange fund with an eye on niche residential asset classes.

Fortress has not publicly disclosed the specific fundraising target for the new fund, which is designed to target the senior living and student housing sectors, Bisnow reported. But the firm’s track record in alternative investments indicates the fund will likely operate at a significant scale.

The fund is utilizing Delaware Statutory Trusts, a legal entity allowing investors to combine capital for passive and fractional real estate ownership. It reportedly accounts for 95 percent of the equity in the securitized 1031 market, benefiting from a 2004 determination that they can be an alternative to traditional 1031 exchanges.

Under the 1031 exchange structure, participants can defer capital gains taxes by reinvesting proceeds from property sales into similar “like-kind” assets.

Senior housing remains a primary target for investors that are increasingly drawn to the sector’s necessity-based demand, which typically remains stable even when discretionary consumer spending declines.

Student housing has similarly emerged as a favored asset class, bolstered by consistent enrollment growth at major universities. The sector often benefits from a supply-demand imbalance in campus-adjacent markets, allowing for reliable rent growth and high occupancy levels.

Fortress’ new fund offers a structure that could allow for greater portfolio diversification without the operational burdens of direct property management. It can also give investors an easier exit ramp than real estate investment trusts provide.

Fortress chief operating officer of real estate equity David Hammerman called the fund “an effective solution to transition from active ownership of smaller-scale assets to fractional, passive ownership of institutional-quality real estate on a tax-deferred basis.”

It’s not the only company considering this path. Nuveen last year launched its own 1031 fund, which is using the UPREIT structure to move sales proceeds into shares of an REIT without the need to pay taxes on the sales.

— Holden Walter-Warner