What is an UPREIT in real estate?

What is an UPREIT?

An UPREIT, or Umbrella Partnership Real Estate Investment Trust, is a structure used in the real estate industry that allows property owners to contribute their properties to a partnership in exchange for operating partnership units (OP units) instead of directly exchanging them for shares in a Real Estate Investment Trust (REIT). This mechanism provides several benefits, including deferral of capital gains taxes that would otherwise be incurred upon the direct sale of the property, as the exchange of property for OP units is not a taxable event.

The UPREIT structure offers property owners liquidity and the opportunity to participate in the potentially larger and diversified portfolio of the REIT, while still maintaining a stake in the performance of their contributed properties. Over time, the owners of the OP units have the option to convert their units into shares of the REIT, subject to the terms outlined in the partnership agreement, which may then trigger a taxable event. This structure has become a popular tool for property owners looking to unlock the value of their real estate assets while deferring taxes and for REITs seeking to grow their portfolios.

Example: Consider a property owner with a highly appreciated commercial building. Instead of selling the building and facing immediate capital gains taxes, the owner contributes the property to an UPREIT's Operating Partnership in exchange for partnership units. This action defers the capital gains taxes and gives the owner an interest in a diversified real estate portfolio managed by the REIT. Over time, the owner can convert these units into shares of the REIT, potentially selling them in the public market under more favorable tax conditions or holding onto them for income and further appreciation.