You convert property to an UPREIT structure by contributing appreciated real estate to a REIT’s operating partnership through a Section 721 exchange and receiving operating partnership, or OP, units instead of cash. The property must be acceptable to the REIT, and the transaction is typically structured with legal, tax, valuation, and debt review before closing.
At a basic level, an UPREIT conversion is not a retail property sale. You are transferring your real estate into the operating partnership of a REIT. In return, you receive OP units that generally correspond to the agreed value of the contributed property.
Those OP units can provide income distributions while you hold them. Later, depending on the partnership agreement, you may convert them into REIT shares or redeem them for cash. That later conversion is generally a taxable event.
1. Identify a REIT that wants your property.
Not every REIT will accept every property. The asset has to fit the REIT’s portfolio, strategy, and underwriting standards.
2. Negotiate value and deal terms.
The REIT and property owner agree on the property’s value, how many OP units will be issued, and what happens to any existing debt.
3. Review debt and tax issues.
If the property is encumbered, the operating partnership may assume or refinance the debt. Debt treatment matters because improperly structured liabilities can create tax complications.
4. Complete the Section 721 contribution.
Instead of selling for cash, you contribute the property to the operating partnership and receive OP units.
5. Hold the OP units under the partnership agreement.
While you hold the units, you may receive distributions tied to the REIT’s operating partnership. You may also be subject to restrictions on when you can convert units into shares or cash.
Property owners usually consider an UPREIT conversion when they want to move from direct ownership to a more passive form of real estate exposure. It may help defer capital gains taxes and depreciation recapture that could otherwise arise from an outright sale.
It can also shift you from a single-property position into a broader portfolio managed by the REIT. That may appeal to owners tired of active management or seeking a different long-term exit strategy.
An UPREIT conversion is not just a tax election. It changes what you own.
• You stop owning the real property directly and instead own OP units.
• OP units generally do not carry the same voting rights as REIT shares.
• Converting OP units into REIT shares or cash usually triggers recognition of deferred gain.
• Some agreements include lockout or holding periods before conversion is allowed.
• OP unit holders may receive K-1s and could face multistate tax filing requirements.
In some cases, investors use a two-step path instead of a direct property contribution. That can involve completing a 1031 exchange into a property or structure already designated by the REIT, then contributing that interest to the operating partnership after a holding period. Whether that approach is available depends on the sponsor, the offering structure, and your facts.
No. A property can only be converted into an UPREIT if a REIT wants to acquire it and the asset fits that REIT’s strategy, quality standards, and structure. Even if your property has appreciated significantly, the REIT must still approve the transaction and its terms.
A properly structured Section 721 contribution may defer capital gains tax and depreciation recapture at the time of contribution. However, tax can be triggered later if you sell the OP units, convert them into REIT shares or cash, or if another taxable event occurs under the agreement.
Generally, no. Once you receive OP units, you hold an interest in the operating partnership rather than direct real estate. That means you typically cannot use those OP units in a later 1031 exchange into other real property, so you should evaluate the conversion carefully with tax and legal advisors.