Investing in an umbrella partnership real estate investment trust (UPREIT) may be considered by some investors due to potential tax-deferral features and access to diversified real estate exposure. Like any type of investment, however, UPREITs will require thorough research to determine whether a particular offering aligns with your objectives. One aspect of due diligence is evaluating the UPREIT sponsor. The sponsor typically serves as the architect, manager, and long-term operator of the UPREIT, with responsibilities that can influence how the UPREIT is managed over time.
In this article, Realized 1031 shares how to evaluate an UPREIT sponsor, helping investors understand what to look for when comparing options.
The Role of the 721 Exchange Sponsor
A 721 exchange allows you to contribute your property into an UPREIT in exchange for operating partnership (OP) units. Under current IRS rules, these contributions are generally not treated as taxable events, making the 721 exchange a potential tool for deferring capital gains taxes. In addition to potential tax deferral, some investors may find UPREITs attractive for reasons such as passive income potential and exposure to professionally managed real estate.
At the center of the UPREIT is the UPREIT sponsor. These are typically real estate firms or developers that contribute and manage a portfolio of properties through the operating partnership. In addition, the sponsor handles the management of these underlying properties and oversees their performance.
A 721 exchange typically limits the role of investors in the management of the UPREIT properties. As such, the sponsor plays a significant role in ongoing operations, risk management, and compliance. Understanding a sponsor’s track record, investment philosophy, and approach to asset and debt management may provide helpful context as part of an overall evaluation.
Why Choosing a 721 Sponsor Matters
Given the significant responsibilities of the UPREIT sponsor, the firm or company you choose may influence how your 721 exchange investment is managed. A sponsor’s experience and capabilities can impact a variety of outcomes. For example, a sponsor with relevant expertise may:
- Improve property performance through experienced management
- Navigate economic downturns to minimize losses
- Establish policies intended to support consistent income distributions
- Oversee capital improvements that may contribute to long-term property value
- Manage debt and risk
Ways To Assess Your UPREIT Exchange Sponsor
What qualities can help you evaluate a potential UPREIT sponsor? Here are several factors to consider as part of your due diligence process.
Track Record and Experience
A sponsor’s history in the industry can offer context about their experience and exposure to different market cycles. While this quality won’t automatically mean they’re good, it may provide insight into the sponsor’s stability and operational continuity. Ask about their past UPREIT portfolios as well as their experience in specific market sectors to gain a deeper understanding of their track record.
Transparency and Reporting Standards
A trustworthy sponsor should be able to provide regular and detailed financial reports. You should be able to easily find their fee structure and performance metrics. A sponsor that values transparency should take communication one step further with investor calls, webinars, or regular Q&A sessions regarding the performance of the UPREIT.
Alignment of Interests
Evaluating whether a sponsor’s compensation and ownership are aligned with investor outcomes is another consideration. As such, it’s important to determine if the sponsor is holding OP units or shares. Reviewing the sponsor’s compensation model can help clarify how their interests may align with those of investors.
Asset and Debt Management Strategy
Determining the asset management strategy of the sponsor is also important. This step gives you ideas regarding the ways they will acquire, manage, and ultimately dispose of the assets. You should also examine the sponsor’s approach to debt and risk management. That way, you can choose a sponsor that aligns with your preferred strategies.
Corporate Governance and Compliance
When evaluating an UPREIT sponsor, it’s important to consider their corporate governance and compliance practices. A well-structured sponsor should have strong oversight mechanisms in place, such as an independent board or oversight committee that ensures accountability. These qualities serve as indicators that the sponsor operates with integrity and prioritizes investor protection.
Wrapping Up: How To Evaluate an UPREIT Sponsor r
When investing in an UPREIT, the sponsor plays a central role in managing the operating partnership. Select one that offers transparency and a reputable track record. Looking at their asset and debt management strategies is also key to assessing whether the offering is consistent with their investment objectives. The bottom line is, look at the sponsor with the same level of vigor you’d apply to any major financial decision.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/articles/03/013103.asp
