Savvy property owners in bigger midwest cities like Tulsa, Oklahoma are always on the lookout for better ways to manage their assets and build a better bottom line. With the demands that your portfolio might place on you as sole manager and investor, partnering in one way or another with a REIT or Real Estate Investment Trust can be the edge you were looking for!

However, there are many different flavors of Real Estate Investment Trust. Today, we're going to explore two common types of collaborations within the REIT category: UPREITs and DownREITs. Read on to find out what UPREITs and DownREITs are, how they are different, and which one might be right for you and your property assets!

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What Is an UPREIT?

An UPREIT or Umbrella Partnership Real Estate Investment Trust is a vehicle through which property owners with appreciated assets can trade their holdings for shares in the UPREIT. There are several notable benefits to utilizing an Umbrella Partnership Real Estate Investment Trust instead of merely selling off your assets in bulk for cash or having to manage a stressful portfolio in perpetuity!

Benefits of an UPREIT:

Tax Deferral

Perhaps the most significant advantage of a transaction with an UPREIT is the fact that it's completed on a tax-deferred basis.

In other words, investors who convert their properties this way do not trigger capital gains taxation because they don't see immediate gains. This shelters your assets from penalizing taxes upfront compared to traditional transactions where an investor sells the appreciated properties for cash.

The system works for you because converted properties are not immediately transferred into publicly-traded stock in the UPREIT but rather into units in the operating partnership portion of the Umbrella Partnership. These can then be converted into stock in the future when you need to transform them into liquid assets.

Having this kind of control over your cash flow is one of the significant benefits of working within an UPREIT structure.

Low-Risk Diversification

The second incentive for a property owner to participate in a UPREIT structure is that a transaction can usually be structured. This enables the property owner to transition one or more of their holdings into a more substantial and balanced portfolio of properties managed by the UPREIT structure.

The portfolio is often diversified geographically and by property type, and can often take advantage of economies of scale through the management that a larger entity can offer. Plus, investors who have had a taste of self-management knows how exhausting it is to police your portfolio: within the UPREIT, your assets are all managed for you!

Return to Liquidity 

The last—but certainly not least—benefit that an UPREIT provides to investors is that it allows illiquid individual properties to become more easily saleable. In a typical UPREIT transaction, a property owner in Tulsa, Oklahoma, can convert his or her units in the partnership into shares of the REIT that are traded publically.

While the conversion to stock may trigger capital gains taxation, the flexibility of parceling the value of their initial investment permits the owner to access capital as needed rather than deal with a bulk sale.

What Is a DownREIT?

While the "UP" in UPREIT stands for Umbrella Partnership, the "Down" in DownREIT doesn't mean anything in particular. Instead, the name is just a means to show that a DownREIT is an alternative to an UPREIT.

Unlike an UPREIT where you have the benefits of an operating partnership, a DownREIT investor forms a joint venture with the REIT.

Essentially, your investment performance continues to depend on only your property—not the REIT's portfolio as a whole. In other words, in a DownREIT, an investor's returns, benefits, and stake in the investment trust is dependent upon the property they traded to the trust from the start.

For investors looking to get away from an asset, this isn't exactly ideal.

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How are UPREITs and DownREITs different?

  • DownREITs are used less often than UPREITs.
  • This is because DownREITs are much more complicated, and many times do not have the same tax benefits as an UPREIT.
  • Contributing property to a DownREIT is a complex transaction requiring professional tax and investment counsel.
  • If the transaction is not constructed precisely, the IRS could consider the transaction to transfer assets to the DownREIT in exchange for operating units in the Real Estate Investment Trust to be taxable.
  • For this reason, an UPREIT is a much safer choice for property owners in Tulsa, Oklahoma, whose foremost concern is tax deferral.

DownREITs can be a viable option if, as an investor, you think the real estate you're interested in transforming will appreciate more than the REIT's other holdings because a DownREIT requires property owners to retain ownership of the property.

  • With a DownREIT, investors retain a greater interest in the contributed property than they do with an UPREIT.
  • However, it is important to consider that the ownership structure of a DownREIT is more complex.
  • UPREITs and DownREITs perform differently as investments because of their different structures.

For example, a DownREIT investor's portion of the REIT partnership can perform differently than the performance of the REIT as a whole, because their investment is tied directly to the property they used to acquire access to the REIT. This means that investors in a DownREIT don't share the umbrella of profitable investments pooled within an UPREIT.

Which One Is Right for You?

We only covered a small sample of the benefits offered through an Umbrella Partnership in this blog post; it's by no means exhaustive!

Do you have more questions about investing or how to get involved in and find the right UPREIT for your portfolio? Whether you peruse The Peak Group blog or get in touch with us directly, we've got the tools and expertise you need to find the financial freedom you deserve with an UPREIT.

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Posted by The Peak Group on March 5, 2020