UPREIT

The real estate industry in countries like Belgium, France, Finland, Australia, and other nations have successfully lobbied their governments to allow them to get closed-end type commercial property funds.

The subsidies provided by the government helps in economic development created by the competition between taxable and non – taxable institutions. The UPREIT structure is called the umbrella partnership REIT where all REIT properties are acquired and owned directly or indirectly by the REITs, which is the entity through which they operate and collect all income from the commercial real estate asset classes.

A typical UPREIT transaction allows the property owners to contribute their share in exchange for ownership units in the partnership.

History –

In the early 1990s, the commercial real estate industry was facing a significant downturn where the real estate capital markets dried up, banks, thrifts, pension's funds and insurance companies stopped lending. Many commercial units had to adopt their own methods to raise equity to pay down the debt.

The UPREIT structure was introduced in 1992 as it could overcome the tax difficulties and it provided the path to privatize real estate firms to contribute to develop permanent capital vehicle and gain access to equity capital markets without paying huge tax bills. The UPREIT provide the structure where the REIT owned all the properties and conducted business through a limited partnership subsidiary called OP.

Such properties gained prominence in 1993. The regulations were passed to encourage institutional investment in the sector. There are certain tax benefits in such transactions. For third party contributing property to the operating partnership, the capital gain tax liability is deferred unless the OP Units are converted into cash or common shares of the REIT.

Some of the conditions followed in such transactions are –

• The REIT's material units consist of the OP, and it receives such units in exchange for the contribution of cash proceeds from the IPO.
• The units are economically equivalent to REIT shares and one can receive per unit cash distributions that are equal to per share cash dividends paid by the REIT to the holders of the shares.
• Typically after one year holding period, the limited partners have the rights to redeem OP (some or all units).
• After redemption, one can pay cash for the units or issue shares in exchange for the units on a one-to-one basis.
• The OP Unitholder earns a portion of the total income of the operating partnership which includes the income from each of the states where it transacts the business.

The UPREIT transaction makes sense in the condition when the property owner is looking to get one or more –

• Defer capital gains tax (given in condition when appreciated real estate is sold)
• Eliminate management hassles of the owning real estate
• Diversify ownership of a real estate portfolio
• Receive consistent quarterly income

The following type of holdings are considered good for UPREIT transaction –

• Family-owned properties with unresolved succession issues
• Possessions with 3rd party tenants
• Partnerships which requires to be dissolved
• Long term assets with low basis
• The surplus generated through consolidations
• Assets with not much value to the owners