Multifamily UPREITs: Nuances, Features, and Benefits

UPREIT, Multifamily Real Estate, Commercial Real EstateThe complications of real estate property management, the desire for diversification, and the nature and process of estate planning are all common reasons for real estate investors to want to exit their real estate investments. Unfortunately, sales of properties for cash are typically taxable events, which means that the investor becomes liable for taxes on the difference between the sales price and the investor’s adjusted tax basis in the property. If the investor has held the property for a long time and substantially depreciated the asset and/or the property has appreciated in value, the tax burden may be significant. Luckily, there are ways for property owners to divest their low-basis multifamily real estate without triggering capital gains through certain tax-deferred transaction structures.

One tax-deferred option is a like-kind exchange under Section 1031 of the Internal Revenue Code (the “Code”), in which an investor exchanges a property for a new property of equal or greater value in what is called a “like-kind exchange”. Depending on the exchange, the new property may be more or less management intensive than the original property. These types of transactions typically do not allow for increased investment diversification.

Another deferral mechanism is a tax-deferred contribution of property to a partnership under Section 721 of the Code, also known in the real estate industry as an UPREIT transaction (where “UPREIT” stands for umbrella partnership real estate investment trust), in which a property owner contributes property to a real estate investment trust’s (REIT’s) subsidiary operating partnership or company in exchange for partnership or membership interests in the operating entity. An UPREIT transaction can allow an investor to essentially trade one property (or a portfolio) for an equity interest in a larger, diversified portfolio that is managed by the REIT and its advisors. The transaction may offer the investor enhanced liquidity options as well.

Intrigued? We invite you to explore the nuances, features, and benefits of UPREIT transactions.

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About The Author

Danner Hickman
Vice President, Research & Analysis
Danner Hickman joined Broadstone in August 2014 and serves as Vice President, Research & Analysis. She is responsible for conducting market, industry, and competitive research for Broadstone and its family of investment offerings, and utilizes her background in finance to assist in the company’s debt capital markets activities. Danner analyzes the effects of real estate and macroeconomic trends on the company’s strategy and performance and also plays an active role in product development and special projects.