Investing in an umbrella partnership real estate investment trust (UPREIT) provides various benefits to investors, like tax deferral and enhanced diversification. Before you enter one, however, it’s crucial to understand the UPREIT’s structure and how exactly it applies to you. This way, you’ll have a grasp of your role as a limited partner and can set your expectations. Below, Realized 1031 shares key insights discussing the role of limited partners in an UPREIT structure.
An UPREIT is an operating partnership (OP) that owns underlying properties. These real estate assets generate income, which is then distributed to the investors who own OP units. To receive OP units, you must first contribute your assets to the UPREIT in a transaction called the 721 exchange, a method that results in the nonrecognition of gains or losses. In other words, you defer capital gains taxes until a triggering event occurs.
As an operating partnership, the UPREIT has a general or controlling partner and limited partners. The general partner is a real estate investment trust (REIT), and it’s in charge of daily management and major capital decisions within the UPREIT. Meanwhile, limited partners are the investors. So, what does it mean to be a limited partner?
In the context of investing, a limited partner is an investor who contributes capital to the partnership but isn’t involved in day-to-day operations. For UPREITs, the capital you contribute comes in the form of your property. By default, only the REIT can become the controlling partner in an UPREIT. All investors must become limited partners, and any deviation could result in the loss of tax-deferral benefits.
Investors who contribute property through a 721 exchange are not the only type of limited partner. Partners can also be entities, such as trusts or estates, that want to contribute property for tax management or estate planning purposes.
Given that only the REIT has full control over the operations of an UPREIT’s underlying properties, it may seem like limited partners have no role in the partnership. The structure is a passive investment, after all. However, limited partners are critical as they are the ones who provide the capital that the UPREITs use to earn income. Without property owners contributing assets, the operating partnership would lack the real estate that underpins the REIT’s portfolio.
This essential role provides limited partners with a few rights, including the following.
Limited partners in UPREITs are the investors, and they play a critical role in ensuring the continued life of the operating partnership. As you contribute your assets, the UPREIT acquires new properties that enhance diversification and potentially increase dividend returns. In return, you gain an ownership stake through OP units and tax-deferral benefits. For property owners seeking a tax-efficient exit strategy that maintains real estate exposure, the limited partner role in an UPREIT offers a strategic path forward.
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