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(Read more on the multifamily market.)

SAN MATEO, CA-Essex Property Trust, the Palo Alto-based apartment REIT, has formed a joint venture with the owner of the land beneath one of its assets here, the Hillsdale Garden Apartments. The 697-unit complex was built in 1948 on 30 acres; Essex acquired the improvements and a 40-year leasehold in September 2006 for $97.3 million, according to SEC filings.

In this latest transaction, Essex contributed its leasehold interest, for which it paid $46,000 per year, and the land owner contributed its fee interest in the land to a joint venture. As a result, Essex now holds an 81.5% interest in the value and operations of the joint venture and also will receive a 3% management fee and a 5% redevelopment/construction management fee from the joint venture.

“It just made sense,” a source at Essex tells GlobeSt.com in explaining the reasoning behind the transaction. “We were paying them to lease the land and the [landowner's] participation in the partnership eliminates that, and we are paying them a portion of the operating income. It works out for both of us.”

The property is approximately 95% leased. Essex has yet to invest substantial dollars in the complex beyond the cost of acquiring it but the company’s modus operandi is buying older properties and adding value. There are no immediate plans to reposition the property, according to the source.

Essex currently has ownership interests in 134 apartment communities (27,676 units), and has 908 units in various stages of development. The company says the transaction will reduce its recurring funds from operations by approximately $.03 per diluted share for the remainder of 2007.

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