ARLINGTON, Va. - With the $178 million purchase of two southeast Florida apartment complexes, Arlington, Va.-based Charles E. Smith Residential Realty Inc. has more than doubled its apartment portfolio in the region. The acquisition means the REIT now owns more than 4,200 units in the area between Palm Beach and Miami Beach, which has been earmarked as a key area of the firm's growth. The seller of the portfolio was made up of a partnership of unnamed institutional investors.

The deal is being funded in part by $71 million gathered by Charles E. Smith from the disposition of three properties in Northern Virginia, as well as one property in Washington, D.C. All four properties sold by Charles E. Smith Residential were Potomac View, Windsor Towers and Columbian-Stratford in northern Virginia; and Fort Chaplin in Washington, D.C. The complexes have a total of 1,248 units.

The two complexes in the Florida acquisition are the 1,470-unit Ocean View at Sunset Point, located in Hollywood Beach, Fla.; and the 1,199-unit Ocean View at Aventura Beach, located in Aventura, Fla. Closing on the latter took place on Dec. 21, 1999; closing on the former is expected by the end of this month. The properties are all located in proximity to shopping and entertainment venues such as Aventura Mall, Bal Harbor Shops and Turnberry Resort.

Ocean View at Sunset Point consists of five high-rise buildings, four of which sit on the oceanfront. The fifth one is on the Intracoastal Waterway. The Aventura Beach complex is made up of three high-rise buildings on the waterway. The average apartment size in each property is more than 1,000 sq. ft., and both feature such amenities as swimming pools, tennis courts, business centers and fitness rooms.

Charles E. Smith Residential will also spend approximately $33 million in capital improvements at the two communities. According to the company, the improvements - which will be made during the next two years - will include in-unit washer/dryers, additional parking, kitchen/bath renovations, and window and balcony modifications.

After receiving Congressional approval in November 1999, the Work Incentives Improvement Act of 1999 was signed into law by President Bill Clinton. Known to Congress as H.R. 1180, the law contains the REIT Modernization Act, which has been highly supported by the National Association of Real Estate Investment Trust (NAREIT) during 1999. The law, which goes into effect Jan. 1, 2001, will allow REITs to own a taxable REIT subsidiary (TRS). In addition, the law will return the distribution requirement of REITs from 95% to 90%.

"That change is obviously important," says Steven A. Wechsler, president and CEO of NAREIT. "[The law] conforms the rule to what we had in effect from 1960 to 1980. I wouldn't expect any large change in the practice of REITs, but it provides REITs with more flexibility in terms of retaining capital."

The law will allow REITs to own up to 100% of the stock of a TRS that can provide services to REIT tenants and others without disqualifying the rents that a REIT receives from tenants. To ensure that a REIT remains focused on core real estate ownership and operations, the law contains size limits on TRSes. According to the law, TRS securities may not exceed 20% of a REIT's assets, and the dividends from a TRS will not qualify as "good income" under a REIT's 75% income test.

The law's restrictions on TRSes will not apply to arrangements in place (including third party subsidiaries) as of July 12, 1999, provided that the third party subsidiary does not engage in a new line of business; its existing business does not increase; and the REIT does not acquire any new securities in the subsidiary.

"This is the most significant item," says Wechsler. "The ability of a REIT to own a TRS will help ensure the REIT is providing the range of services appropriate to the emerging real estate marketplace."

The law is also making some technical changes about how a company computes pre-REIT earnings and profits that it must distribute to its shareholders after electing REIT status or merging with a C-Corp. Additionally, beginning in 2001, REITs will be able to hire an independent contractor to operate nursing homes (and other healthcare facilities) without a lease for up to six years when the REIT takes back a healthcare property at the end of a lease and can not re-lease it.

"We believe [the law] is a constructive step and a positive change in policy," says Wechsler. "[The law] is a development which will allow REITs to remain competitive, and it will help ensure that REITs and publicly traded real estate companies are providing a full range of services to customers while still remaining focused."