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UPREITs: Want to Know More?

After our last post on UPREITs and 721 exchanges, we had some questions from our readers, so we thought we'd take a moment and discuss UPREITs in a little more depth for those of you who might also like to know more.

UPREIT stands for Umbrella Partnership Real Estate Investment Trust. The UPREIT's main purpose is to allow property owners to contribute their properties into the UPREIT in exchange for units in the UPREIT through a tax-deferred 721 exchange.  The UPREIT structure has been around since 1992.

UPREIT structure and terms:

  • Property contributors receive units of interest in the Umbrella Partnership, also referred to as the Operating Partnership (OP), in exchange for their properties. They become OP unitholders.
  • The OP maintains ownership of the properties and distributes the income to the unitholders.
  • The associated REIT, which sells shares of common stock to cash investors, exchanges cash for units of interest in the OP and distributes the income received from the OP to the shareholders.
  • OP unitholders may choose to exchange OP units for REIT shares, which could be more easily sold. This gives unitholders a liquidation option and would cause a taxable event for the OP unitholder who entered into the OP through a 721 exchange.
  • OP units and REIT shares are typically valued equally and revalued at the same time.

Who is a good UPREIT Candidate?

  • Property owners concerned they have too much of their net worth tied up in real estate.
  • Partnerships that need to be dissolved.
  • Property owners with surplus property generated by consolidations.
  • Property owners who are looking to:
  • Defer capital gains tax when appreciated real estate is sold;
  • Avoid property management responsibilities;
  • Diversify their assets by exchanging a single property for interest in a portfolio of properties;
  • Upgrade to institutional quality real estate; and
  • Receive consistent quarterly income.

What is a good UPREIT candidate property?

  • Family-owned properties with unresolved succession issues;
  • Properties with third-party tenants;
  • Properties that meet REIT investment criteria (which can vary); and
  • Long-term assets with very low basis.

What is the benefit for the UPREIT?

One of the main benefits for REITs to be structured as UPREITs is that the properties can be acquired without the use of capital. A traditional REIT requires enough shares to be sold to finance the acquisition of properties. Properties are then acquired one by one as share sales increase and loans are secured to finance the properties. When an OP can acquire property in exchange for units of interest in the OP, no financing or share sales are required. The funds received from REIT share sales then are used to acquire additional property, reduce loans, finance property improvements and maintenance, and for other operating costs.

Additionally, UPREITs have the benefit of attracting real estate investors who may not be in the position to invest in a REIT portfolio because their finances are tied up in a single investment property. The property owners benefit by receiving units of a diversified portfolio, and the UPREIT benefits by acquiring another property to contribute to the diversity of the portfolio.

One other benefit for the UPREIT is that is has the potential to more easily acquire high-valued, investment-grade properties that were previously owned by Delaware Statutory Trusts (DSTs) or other Institutional real estate funds. These funds often use UPREITs and 721 exchanges as their exit strategy. When their holding periods expire, they need to sell their properties. As their properties typically meet and exceed the REIT's investment criteria, an exchange transaction with the UPREIT can often be a simpler process than a sales transaction. This also provides the DST beneficiaries with the benefits of a 721 exchange into an UPREIT.     

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.