Transfer of Real Property into an UPREIT

[Brian Raynoha]

Real Estate Investment Trusts (“REITs”) allow individual investors to invest in large-scale income producing real estate typically owned by a company. These are an excellent way for individuals to earn a share through commercial real estate ownership without having to purchase commercial real estate.

While buying REIT's are a perfect way to diversify your real estate portfolio they, unfortunately, do not qualify as a suitable replacement property for a 1031 exchange. In other words, you cannot sell your real property and exchange those proceeds into a REIT.

An UPREIT ("Umbrella Partnership Real Estate Investment Trust") may provide a solution to this. In these cases, property owners contribute their real estate directly to the Operating Partnership subsidiary. An arrangement is made between the property investor and REIT to transfer the ownership of appreciated real estate (also known as a 721 exchange). The property owner receives operating partnership units within the REIT called Operating Partnership (OP) Units.

By receiving the OP units instead of cash, the property owner can defer capital gains until either:

• The OP units are sold
• The units are converted into REIT shares, or
• The REIT owner sells the contributed property

The challenge is that the property must by one that the REIT wants to add to its portfolio, which can bring some challenges.

These 721 exchanges rarely happen, has anyone had a successful transfer of real property into an UPREIT and what challenges did you face?