UPREITs: Keeping Real Estate Investments in Play

Asset managers know there’s more than one way to invest in real estate, and many of them manage multiple funds with different strategies and structures to give investors options. Those choices might include either a Delaware Statutory Trust (DST) or a Real Estate Investment Trust (REIT)—tax-advantaged alternative investment products that grew in popularity after the economic crisis of 2007-09.

More recently, sponsors have begun equipping their DSTs with an exit strategy that lets investors keep their investment in play without taxation by bridging it from a less-liquid DST to the operating partnership (OP) of a REIT, while staying with the same sponsor.

These special property-to-OP unit conversions are known as UPREITs, or umbrella partnership real estate investment trust transactions. UPREITs have emerged as the latest evolution in the DST space, which last year raised a record $9 billion, according to data from Mountain Dell Consulting.

Sponsors employ UPREIT transactions because they create a more stable investment compared with the DST structure, which for tax purposes has many restrictions that limit the ability to hold investments long term, add capital and maximize a property’s value. Advisors recommend them because they offer their clients more liquid investment options, tax planning flexibility and portfolio diversification. And investors prize their ability to increase access to economies of scale—exposing them to the larger, diversified, better-capitalized portfolios of properties that REITs manage through the operating partnership, which can potentially reduce their exposure to risk.

“Three years ago, 100% of our exit planning practice with respect to 1031 exchanges was concentrated in traditional DSTs,” said Carl Sera, president of Sera Capital Management, a registered investment advisor and real estate consultant. “Now it is about 30% with the UPREIT solution at 70%. Once people analyze the differences, it becomes obvious which way they should go.”
Why the upward trend in UPREITs? In short: DSTs are maturing and the UPREIT reflects adoption of the structure commonly used by institutions for decades. As more financial professionals and individual investors learn about this exit option, and its potential benefits, the more word spreads about it. UPREITs were pioneered by Sam Zell in the 1980s and, over the last five years, by sponsors Dividend Capital (now Ares Management), JLL and others who broke into the wirehouses with this type of DST structure and where, to date, the most volume in UPREIT transactions has occurred.

DSTs typically consist of a single property, have a holding period of about five to seven years and are largely illiquid. Selling a DST investment to another accredited investor can be logistically difficult, and 1031 exchanges—”like-kind” exchanges that let investors roll proceeds from one property into another—while also tax-advantaged, are typically less flexible than UPREITs.

(This news/press release has not been altered by investment.net, apart from the headline, and has been obtained from a syndicated source:- https://www.wealthmanagement.com/reits/upreits-keeping-real-estate-investments-play)