Presentation on theme: "Alternatives to 1031 Exchanges"— Presentation transcript:
1 Alternatives to 1031 Exchanges UPREITs and Down REITs
2 Sometimes a 1031 exchange may not work for a seller • The ownership structure makes it difficult or impossible to do a 1031 exchange;• wish to get off the “1031 merry-go-round”;• Desire to continue owning an interest in theasset;• Have an estate planning need or a family orpartnership structuring need;• Have a partnership dispute where one ormore partners wish to exit the deal and otherpartners wish to remain invested in the deal;and/or• Have equity in the asset but cannot sell theasset due to the debt structure secured bythe asset.Alternatives to 1031 Exchanges
3 The UPREIT or DownREIT structure as an alternatives to 1031 exchanges. These structures have many advantages over the more traditional 1031 “like-kind” exchanges which do not allow diversification, future liquidity, the ability to dispose of a partial interest, or a pre-determined exit strategy.For these reasons, the UPREIT and DownREIT structured transactions have become a viable alternative for sellers and investors.
4 The UPREIT Alternative Holders of the OP Units receive monthly distributions of cash.They also receive rights to “put” their OP Units to the REIT for an equivalent number of REIT shares which can be redeemed for cash, thereby each investor can determine if and when they incur a taxable event.Some put holders do not exercise their put option unless they need cash for some reason.They can elect to hold the OP Units until their deaths so they can take advantage of current estate tax laws. This allows heirs to exercise the option without incurring income taxes.Alternatively, the holder of the put has the option to exchange their OP Units when it best suits them to generate cash when needed.The UPREIT AlternativeIRS Section 721 allows a taxpayer to exchange rental or investment real estate ultimately for shares in a REIT.This is called an “UPREIT” or a “721 Exchange”.The UPREIT structure was created to avoid or defer recognition of taxable income for existing property owners on the transfer of appreciated property to a REIT.In a typical UPREIT structure, one or more persons owning real estate contribute their holdings to an “umbrella partnership” in exchange for limited partnership units, sometimes called Operating Partnership Units (“OP Units”).OP Units carry the economic benefits of the REIT’s entire portfolio, including distributions of cash and operating income.
5 The UPREIT Alternative When investors wish to obtain OP Units and cash at the time of transfer, or require greater flexibility in structuring the transaction, or wish to maintain certain ongoing control in the asset(s) being transferred, they may find the “DownREIT” an attractive alternative.Unlike an UPREIT, the DownREIT is a joint venture between the REIT and the property owner.Only the property being transferred is owned by the newly formed joint venture (usually a limited partnership or LLC) and performance is tied solely to the specific asset(s), not the performance of the REIT’s entire portfolio.Distributions to the partners are determined based on the performance of the specific asset(s) and distributions can be structured to meet the partners’ needs..The UPREIT AlternativeSimilar to an UPREIT or a 1031 like-kind exchange, recognition of taxable income on the transfer of appreciated property is deferred or avoided.The transferor partners may receive the right to put their joint venture interests to the Operating Partnership in exchange for OP Units thereby converting their economic interest from the specific asset(s) to the REIT’s entire portfolio, and receive monthly distributions.They could also receive the right to put their OP Units to the REIT for an equivalent number of REIT shares, which can be redeemed for cash.In this way, each seller gains tax planning flexibility, and can determine if and when they “cash-out” and incur a taxable event. The DownREIT transaction is usually more appropriate when the property owner believes that his or her property will outperform the rest of the REIT’s portfolio.
6 United Realty Trust acquires assets through an UPREIT and DownREIT structure. These structures have many advantages over the more traditional Section 1031 “like-kind” exchanges which do not allow diversification, future liquidity, the ability to dispose of a partial interest, or a pre-determined exit strategy.For these reasons, the UPREIT andDownREIT structured transactions have become a viable alternative for sellers and investors.
7 Tax Deferred Treatment and Benefits of an UPREIT or DownREIT Structure with URTI: Capital gain and depreciation recapture taxes are tax-deferred as long as the UPREIT or DownREIT continues to hold the investment real estate and the investor continues to hold the interest in the joint venture or operating partnership. When an investor wishes to “cash-out”, the investor exercises the put options and converts his or her OP Units to shares of common stock in the REIT and, subject to the appropriate holding period, he or she can redeem the Common Shares for cash.
8 Thank You Alternatives to 1031 Exchanges For More Information Jacob FrydmanChairman, CEOUnited Realty Trust Incorporated44 Wall Street | New York, NY 10005Direct: | Main: