One of the more under-discussed aspects of REITs are how they can benefit a seller of real estate. By contributing a property to a REIT you can achieve many of the same benefits associated with a §1031 exchange including deferral of gain recognition. For the owner looking to monetize their investment in a tax advantaged manner with the possibility of additional upside this option deserves some additional examination.
Of the different types of REITs that exist, one sticks out as being particularly useful to sellers of real estate. The UPREIT. An UPREIT (Umbrella Partnership REIT) structure is one that has a REIT at the top of the structure and a partnership, which directly owns the real estate below it. Thus, the REIT simply owns an interest in the underlying partnership and not title to the actual properties themselves.
Some REITs, known as DOWNREITs will acquire some properties outright, and also have interests in a lower tier partnership, which directly owns properties. This article will focus on the UPREIT however it's worth pointing out that the outcome for a contributor of property from a tax perspective is the same with an UPREIT as it is a DOWNREIT. The major question is why the seemingly convoluted structure?
One of the mechanisms by which these UPREITs acquire properties in their lower tier partnership (the “OP” or operating partnership) is by contribution. That is to say, an owner contributes their property into the OP in return for an ownership interest in the partnership, usually referred to as “units”.
These units are typically transferable one for one with shares of the REIT's stock. The number of units received for the property is negotiated in much the same way it would be if the property were being sold for cash. For example, if the property being contributed had a fair market value of $1Mil and the stock of the REIT was trading for $25/Share than the contributor of the property would likely receive 40,000 units.
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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.
