When entering an umbrella partnership real estate investment trust (UPREIT), your assessment should go beyond the underlying properties or the promised monthly dividends. A savvy investor should also look at the UPREIT governance. Knowing how these entities are managed, how decisions are made, and how transparency is demonstrated can help you determine if a certain UPREIT fits your needs. Below, Realized 1031 has shared features and characteristics to look for.
Understanding UPREIT Governance
Governance in UPREIT refers to the rules, systems, and principles that guide decision-making and management across the entire organization. Every member of the REIT, from the board of directors to management teams, is beholden to these processes and regulations. UPREIT governance ensures transparency, accountability, and effective operation of the trust.
UPREITs are unique compared to other REITs because there are two tiers in their structure: the REIT and the operating partnership (OP). The REIT has controlling interests in the OP, and the OP is the actual owner of the real estate assets. Investors who contribute their property to the OP own OP units. Given this complex governance structure, you have additional considerations to keep in mind when assessing UPREITs.
Critical Factors to Consider When Assessing UPREIT Governance
Given how the REIT has the controlling interest over the OP, they handle most of the responsibility and tasks related to governing the portfolio as a whole. As such, investors should focus on the following considerations.
Board Independence and Expertise
A board of directors who have years of experience in handling REIT operations is key to an UPREIT’s success. Make sure to choose one with a board that has experience in real estate, finance, and regulatory compliance. One other key consideration is that they must be independent from management. This separation ensures that they can provide objective oversight.
Alignment of Interests
UPREITs have features that increase the chances of alignment between management and shareholders. However, this agreement is not always guaranteed. Some REITs might focus on property acquisition while others on appreciation. As such, always examine aspects like executive compensation structures and OP unit conversion policies. That way, you can find an UPREIT that makes decisions with investor interest in mind.
Transparency
UPREITs should provide clear and timely disclosures about financial performance, operating partnership activities, and governance decisions. During your governance assessment, make sure to examine key documents and practices such as the following.
- SEC Filings
- Performance Benchmarks
- Risk Factor Analysis
- Auditor Independence and Financial Reports
If you find it hard to access information like the above, then it’s more likely that the UPREIT is facing governance issues.
Management of Conflict of Interest
The structure of UPREITs makes it more likely for REITs and the operating partnership to have some conflict of interest. Areas like property acquisition, capital improvements, and tenant selection are often the source of these challenges. An UPREIT with good governance must have systems to manage and resolve these conflicts. These processes include clear guidelines, disclosure standards, and the presence of independent committees or third-party oversight.
Voting Rights and Unitholder Management
Some UPREITs grant limited voting rights to OP unit holders, while shareholders of the REIT may have more formal influence. Regardless, investors should determine if the voting rights are fairly distributed and if investors can influence board appointments or major capital decisions.
Wrapping Up: Choosing UPREITs Based on Governance
While governance is not the first factor you’d look into when choosing UPREITs, it’s still worth examining. Good governance principles like transparency, conflict management, and interest alignment contribute to long-term success, helping create a stable UPREIT that operates like a well-oiled machine.
Sources:
https://www.investopedia.com/terms/c/corporategovernance.asp
https://www.investopedia.com/terms/c/controllinginterest.asp
