Using an UPREIT Structure to Get Some Partners Out, Keep Some Partners In, and Retain Management

An UPREIT (Umbrella Partnership Real Estate Investment Trust) structure allows for flexibility in managing partnerships by enabling certain partners to exit, while retaining others and keeping management in place. This structure is particularly useful when partners have different goals regarding liquidity and long-term involvement in the property.

Key Issue

A real estate partnership with multiple partners wants to restructure. Some partners are looking for an exit strategy to cash out their equity, while others wish to remain invested. The management team also needs to stay in place to continue operating the property.

UPREIT Solution

The UPREIT structure enables the partnership to:

1. Transfer assets into an operating partnership (OP) controlled by the REIT.

2. Offer partners the option to exchange their partnership interests for operating partnership units (OP Units) or REIT shares.

   • Partners who want to exit can sell their OP Units for REIT shares, which can be liquidated on the stock market or kept for potential growth.

   • Partners who want to stay can hold onto their OP Units, deferring taxes on the exchange until they later sell or convert to REIT shares.

3. Keep management in place to continue running the property without disruption.

Benefits

• Tax deferral: Partners who retain OP Units benefit from tax deferral, avoiding immediate capital gains taxes.

• Liquidity: Provides an exit option for partners seeking liquidity through fractional REIT shares.

• Management continuity: The structure keeps the current management team in place, ensuring business continuity.

• Flexible restructuring: Customizable for partners with different goals without selling the entire property.

FAQs

1. Will the partners cashing out have a taxable event?

   • Yes, partners who exchange their partnership interests (or OP Units) for REIT shares and then sell those shares will trigger a taxable event. The sale of REIT shares is treated as a sale of securities, which will be subject to capital gains tax. However, the exchange of OP Units itself does not immediately trigger taxes—it is the sale of REIT shares that results in tax liability.

     
     
   
   

2. Can the partners cashing out use a 1031 exchange if the property is converted to a DST (Delaware Statutory Trust) structure?

   • Yes, partners may be able to utilize a 1031 exchange if the property is converted into a DST structure before the sale. The DST qualifies as "like-kind" property for 1031 exchanges, allowing partners to defer capital gains taxes by reinvesting the proceeds into another like-kind property. However, it is essential that the DST structure is established correctly, and partners must meet all 1031 exchange requirements, including identifying replacement property within 45 days and closing within 180 days.