The UPREIT, 1031/721 exchange, and benefits explained...
What is an UPREIT (1031/721 or Like-Kind Exchange)?
An Umbrella Partnership Real Estate Investment Trust, or UPREIT is a new ownership structure that includes an operating partnership (OP) and the REIT who is the partner in the OP. In this structure, typically there are 2 types of exchanges that occur, the 1031/721 or a direct 721.
What is a 1031/721 Exchange?
In a 1031/721 exchange, there is a flow and criteria that needs to be met to be successful. First, there needs to be a disposition* of the original property. From this comes the sales proceeds that are held in a qualified intermediary*, then reinvested as a fractional investment that meets the criteria of the REIT. The fractional investment must be held for about 24 months, the good news is that, during this time period, dividends may be payed out to the investor. After the period is over, the fractional shares can be contributed to the REIT in exchange for operating partnership units. The operating partnership units receive dividends as if they were shares within the REIT itself. The OP units can also be converted into REIT shares.
*Terms defined:
- Disposition means the removal of the space from the portfolio through the ending of a leasehold or the sale of owned property
- A §1031 Qualified Intermediary (QI), also known as an Accommodator, is a company that facilitates Internal Revenue Code section 1031 tax-deferred exchanges. The role of a QI is defined in Treas. Reg. §1.1031(k)-1(g)(4). Under IRC Section 1031 an owner of business or investment property may exchange that property for other like-kind property within a statutorily mandated period of time, and defer current recognition of gain on the sale of the old property.
What is a direct 721 Exchange?
In a direct 721 exchange, the property owner contributes the property directly into the REIT in exchange for OP units. These units will then be converted into shares of the REIT. In this scenario the OP units will also receive dividends as if they were actual shares in the REIT.
What benefits can an UPREIT provide?
· Defer paying capital gains tax: Capital gains on a property typically ranges from 20-35 percent, while investing into the UPREIT allows for 100% of the funds to be invested.
· Diversification: Instead of owning one property, you are now holding an interest into a portfolio that is built up of multiple income producing properties.
· Passive Income: REIT shareholders are passive, meaning the managers of the REIT manage the properties and the shareholder is now completely hands off.
· Estate Planning: For next-of-kin, shares can be passed down easily, equally split and permit avoiding the capital gains taxes from a traditional sale of an estate.
· Liquidity: Properties typically aren’t very liquid; however, OP shares are and can easily be converted into REIT shares on your time.
· Avoiding risk of negative cashflow: Now that you are a shareholder, you will no longer have the risk of having a negative cashflow.
· Quarterly Income: As a shareholder, each quarter you can receive a more stable dividend.
Wesley Wolfe
Account Executive of Investment Sales, San Antonio Division
The TCO ONE REIT, acquires multi-family apartments and mixed-use properties with the intention to bring consistent passive income back to you, the investor. Are you looking for an UPREIT to perform a like-kind exchange with for your Commercial Real Estate property? The TCO ONE REIT now accepts these types of transaction. This is your opportunity to Defer paying capital gains tax and Diversify your investment portfolio. This investment structure offers you the ability to invest in something bigger than what you could do individually.
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