UPREIT – Upfront Investment in Real Estate
UPREIT stands for “up-front investment in real estate” and gives an investor a stake in a real estate portfolio, instead of just a single property. An UPREIT is an excellent way to diversify an investor’s portfolio and eliminate dependence on one property. While real estate isn’t a liquid asset, REIT shares can be converted to cash or sold for a taxable gain. Moreover, investors who want more predictable income distributions can convert their real estate partnership units to REIT shares.
UPREIT structures allow the real estate owner to contribute property to an umbrella partnership. This property is usually subject to debt. The umbrella partnership exchanges limited partnership units for REIT shares and “put” options. Upon the death of the unit holder, these options can be exercised by the heirs. In that case, the heirs can avoid paying taxes on appreciation of the real estate property. UPREITs are a good choice for investors looking for an alternative exit strategy.
UPREITs are a great option for investors looking to diversify their investments and invest in properties with high appreciation potential. Unlike other types of investment vehicles, an UPREIT structure allows property owners to contribute assets to an “operating partnership” in exchange for interests in that partnership. The benefits of this arrangement are many. You’ll get to avoid taxes on appreciation of the real estate, while achieving diversification.
UPREIT Tax deferral
A tax deferral UPREIT is an investment vehicle in which you acquire shares in a real estate partnership in exchange for a real estate property. In this way, you avoid having to pay capital gains tax on the sale of your real estate. In addition, you defer your tax liability by transferring the units into your name, rather than on the property itself. In the US, these units are known as “units.”
When you make a contribution to an UPREIT partnership, you may not realize that the real property you are contributing is subject to debt. If you have debt on that property, the UPREIT will treat the reduction of the debt as a cash distribution, reducing your basis in the partnership. UPREITs can also avoid taxes on capital gains when real estate is sold to a third party. That’s a significant benefit, especially if you’re paying property taxes.
Funds From Operation (FFO)
Investors often refer to the Funds From Operations (FFO) of an upreit as “net operating income,” but AFFO, or Adjusted Facts From Operations, is a more accurate measure of the cash flows generated by the real estate investment trust. This measure takes into account maintenance and other costs, such as roof replacements, re-carpeting, and painting projects. The income is then rounded to the nearest hundredth. Funds from operations can be used to evaluate the future cash flows of a REIT.
This measure of profitability is calculated using net income, or NOI, and depreciation and amortization. As with earnings per share, Funds From Operation is a key indicator of an upreit’s profitability. Funds from operation are often valued on a Price/FFO basis, which subtracts depreciation and amortization expense. Real estate assets typically depreciate over time, so subtracting depreciation from the FFO provides a more realistic picture of REIT’s financial health.
UPREIT Security loan option
If you’re considering an UPREIT security loan, consider the terms and conditions of your loan. The loan agreement is a legal document that involves the UPREIT and the lender. UPREIT guarantees certain obligations under the loan agreement. Borrowers must be in compliance with these obligations and covenants as of March 31, 2013.
UPREIT Tax implications
An UPREIT offers investors the benefits of a partnership without the limitations and complexity of a REIT. The investor can convert his limited partnership units into REIT shares or cash without the need to sell his property. While a limited partnership can be a great estate planning tool, a UPREIT can have broader tax implications. For one thing, a UPREIT allows the taxpayer to defer capital gains taxes while receiving dividend income from the partnership. The heirs of the partnership will benefit from the step-up in basis and no recapture of depreciation.
UPREITs are a great option for property owners, especially those who do not have the funds to invest in the real estate market. The benefits of these investments extend to individual property owners, as well as those with commercial property. Under a Section 721 exchange, property owners receive value in the form of UPREIT units. The transaction is not taxed and unitholders are taxed on the general REIT taxation standards. Some property owners may even use an UPREIT as part of estate planning. This way, they can avoid paying estate taxes.