UPREIT Vs DOWNREIT

Publication Date :

17 Apr, 2024

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Table Of Contents

Difference Between UPREIT And DOWNREIT

The primary difference between a UPREIT and a DOWNREIT lies in the transfer of ownership and control of real estate assets. A UPREIT system comprises a partnership between a publicly traded Real Estate Investment Trust (REIT) and the property owner, where partnership units get transferred to the property owner for contributing their property into a partnership. In contrast, DOWNREIT involves partnership creation between REIT and its subsidiary unit, giving ownership to the subsidiary while leasing it back to REIT.

Difference between UPREIT vs. DOWNREIT

UPREIT allows property owners to contribute their property to a partnership with a REIT and receive operating partnership (OP) units.
It benefits all parties by providing real estate diversification, liquidity, tax deferment, finance for acquisitions, and multiple sources of income for the REIT.
DOWNREIT allows property owners to hand over their property to a subsidiary of a publicly listed REIT for leasing to the REIT while retaining ownership units in the created entity and obtaining tax benefits.
The REIT also benefits from tax benefits and a way to acquire real estate properties without paying a premium.

Comparative Table

Let us use the table below to understand the basic differences between the two:

Feature	UPREIT	DOWNREIT
Definition	It represents a partnership between a publicly traded REIT and a property owner.	A partnership between REIT and its subsidiary entity regarding the property.
Ownership Structure	Partnership receives the property from the owner of the property.	Partnership gets the leased ownership of the property from the subsidiary of the REIT.
Transfer of Control	Transfer of ownership and control happens from the property owner to the REIT.	No real transfer of ownership and transfer happens to the REIT but remains with the subsidiary.
Taxation	The property gets the ability to defer taxes on their property-on-property appreciation.	A property owner does not have any such taxation benefits.
Benefits for Property Owner	It benefits the property owner by converting the property into revenue-generating security.	It facilitates the subsidiary to raise capital for mergers and acquisitions.
Capital Raising	It helps REITs to raise capital for upcoming acquisitions.	Here the subsidiary can raise capital for future acquisitions.
Liquidity	It acts as a key tool to transform one's property into liquid assets.	The subsidiary entity does not receive any such liquidity benefits.
Investor Access	Investors get access to a widely diversified real estate portfolio of REITs directly.	Investors get access to a widely diversified real estate portfolio of REIT indirectly.
Legal Structure	It is formed by a legal partnership agreement between the REIT and the property owner.	Here, the subsidiary can raise capital for future acquisitions.
Availability	Moreover, it has a presence in most regions.	It is not present in all regions.

What Is UPREIT?

UPREIT stands for Umbrella Partnership Real Estate Investment Trust. It is an investment structure allowing property owners to contribute to the partnership with REIT and get operating partnership (OP) units, which are exposed to maximum benefits that come from the REIT shares.

It benefits the investor, owner, and REIT in the following manner:

An investor gets exposure to real estate portfolio diversification.
The property owner gets the liquidity of their property.
The property owner gets the tax deferment benefits.
Property owners get to invest in REITs without selling their property.
Property owners do not have to pay capital gains tax.
REIT gets to raise finance for future acquisitions.
REIT gets the ownership and control of the property.
Hence, REITs get multiple sources of income through management, leasing and other activities.

On the whole, it acts as a key factor in unleashing the potential values of a property to its owner through getting an opportunity to invest in a publicly traded REIT. Meanwhile, it also provides tax benefits to the owner.

What Is DOWNREIT?

DOWNREIT refers to an arrangement between the property owner and subsidiary of a publicly listed REIT of handing over the property to a subsidiary for further leasing it to the REIT. The property owner does not contribute anything towards the partnership with REIT. Such a subsidiary usually exists in the form of a limited partnership (LP) or as a limited liability company (LLC). However, the property owner gets the ownership nits in the entity created in place of the contributed property.

Hence, the subsidiary LLC or LP then leases the property to the REIT, leading to income generation via management, leasing or another activity. Furthermore, it does not take away ownership and control from the property owner while also giving them a solid way of income stream to them.

Moreover, it also provides tax benefits to the owner of the property. In addition, REITs get a way to acquire real estate properties without paying any premium for them. REIT also gets taxation benefits for the arrangement with its subsidiary.

Similarities

Here are the similarities between the two:

Feature	UPREIT	DOWNREIT
Partnership Structure	Both have structured partnerships between different entities.	Both involve REIT and its subsidiary as partners.
Real Estate Ownership	Both involve real estate asset ownership.	Both allow the transformation of real estate assets into income-generating securities.
Investor Access	Both involve REIT and its subsidiaries as partners.	Both can be used to raise capital for future growth and acquisitions
Legal Requirements	Both have to meet the legal requirements of a partnership agreement	Both need to comply with securities regulations and laws.
Tax Implications	Both have tax implications for the stakeholders of the partnership	Both offer taxation benefits to investors.
Diversification Benefits	Both help in risk mitigation while also diversifying the real estate portfolio.	Both give liquidity benefits to the partnership signatories.