Net Lease investments have long been a haven for those looking to invest in real estate without the headaches associated with management. Owners can rely on a predictable cash flow stream and a risk profile that’s essentially a function of their tenant’s credit.
Still though, there is an inherent lack of liquidity in real estate investments, triple-net or otherwise. Also, the notion of management and diversification takes on new meaning depending upon whether you own one property or twenty. Once you eclipse ten or twenty properties in a portfolio, even triple-net ones, management can become an issue. A tenant will always be rolling, and issues will present themselves regularly that need to be dealt with whether we want to or not.
At the other end of the spectrum, perhaps you own just one large property. An industrial warehouse, or a big box store, perhaps it was inherited. Now, all your eggs are in one basket from a diversification standpoint.
For the family, portfolio, or large single asset owner another ownership option is the REIT. Specifically, the UPREIT. These types of REITs are the perfect fit for the investor who doesn’t want any management responsibilities or the large single asset owner looking to diversify.
The way it works is the property owner contributes their property to the UPREIT in return for units in a partnership, which are transferable into shares in the REIT. The contribution of the property doesn’t trigger any tax gain. It’s not until the units are swapped for REIT shares that any tax is incurred. In this way it’s similar to a 1031 exchange. Additionally, like a 1031 exchange, it’s basically a cashless transaction from the perspective of the seller/contributor.
The difference is you are trading into something which is very liquid (assuming it’s a public REIT), as opposed to another piece of real estate. There is also potential upside in that the value of the stock can increase. Additionally, if you contribute one property into the REIT you’re now effectively diversified -- owning part of all the REIT’s properties. This is in contrast to exchanging one property for another. Furthermore, by not recognizing gain until you convert your units, you can choose the timing of your gain recognition.
Lastly, during your holding period you’re still receiving regular distributions. You still have a solid income producing investment.
None of this is new. This structure has existed for years. Recently, the startup of several new Net-Lease REITs (some public) has shined a new light on this opportunity. We’ve actually just put together a new whitepaper, which illustrates the process; its pros and cons.
Click Here to get it.
Many of the new funds and REITs that have started up recently have been having the same problem that every net lease investor has been having; the utter lack of quality inventory. It will be interesting to see if UPREIT contributions free up some of the quality product that has thus far been on the sidelines.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
