How does an UPREIT benefit the REIT (GP)
I understand how property sellers benefit from entering into transactions with UPREITs, but how do REITs themselves who are GPs in UPREITs benefit? Thanks.
I think the biggest advantage to the REIT is that it isn't a "cash expense" to acquire a new property or portfolio. In lieu of cash, the REIT is offering OP units which are the equivalent of shares essentially to the seller. This can help if the REIT is facing cash management issues, doesn't have a ton of cash available. This also helps the REIT avoid doing a public offering to raise the funds.
Why not do a public offering you ask? They may not have a large pipeline of deals lined up to use the proceeds. E.g. issuing $100M of equity at a 5% dividend but only having $30-50M of RE acquisitions lined up in the near future is dilutive. Offerings have legal and admin fees as well as fees toward IBs so it likely isn't efficient to do a small public offering.
If it isn't a cash expense, how does the UPREIT (or REIT) record an UPREIT transaction in its financial statements? Sorry if this is a stupid question lol If I had to take a guess, I presume it would have something to do with the shareholder's equity part of the Balance sheet? I'm still unsure tho.
Debit real estate asset, credit equity
I think that the fact that it is useful the seller is why it's useful for the buyer - family business owns a fully depreciated asset, they may lean toward selecting the buyer who can offer them a tax-advantaged structure. Big-RE-Guy laid out all of the tactical reasons well but in the long run, the REIT was going to issue debt and equity to fund a purchase anyway, so if you can increase your chances of winning a deal by doing it directly it doesn't make much difference for the REIT.
I’d say the biggest advantage to the buyer is overcoming one of the biggest obstacles to getting a deal done. A lot of property owners (especially family types) have owned the asset for a long time, don’t need to sell, and are sitting on a large unrealized capital gain. They either don’t know how do a 1031, don’t want to, or are afraid they can’t pull it off. UPREITs provide a tax efficient solution to their problems.
The prevalence of the UPREIT structure really started to pick up in the 1990s when more real estate holding companies began to IPO. By adopting an UPREIT structure, the GP, who owns units in the operating company it “umbrella” operating partnership as I believe it’s technically called, can be issued shares of the new REIT without triggering capital gains taxes. In this way, real estate portfolio owners can gain access to all of the benefits of the public market without having to pay capital gains taxes on the shares that they are issued from the UPREIT.
To answer your question, they can collect more fees and can get deals done with no transaction costs or the need to raise equity.
An example of a successful UPREIT scenario for example is a bunch of aging landlords finding themselves struggling to manage their properties. Therefore they sell their assets into an UPREIT where they can get tax benefits, some diversification and take advantage of the manager's experience and scale. Managers can earn substantial money by charging management fees which can scale very well.
Just to clarify, the UPREIT's managers charge the "aging landlords" management fees?
Consequatur omnis quod nemo est ipsum asperiores corporis voluptas. Amet illum officiis culpa ut non.
Expedita inventore eum at placeat laudantium et. Et aut voluptatem dolore ut dolorem et voluptatibus ea. Blanditiis eum odit commodi ut et perspiciatis. Ut numquam aliquid tempore aspernatur eveniet similique est. Aut rerum magnam neque perferendis eos vel cupiditate.
Velit aspernatur consequuntur eius. Quas aliquid ut non consequatur ut perspiciatis. Ex omnis sit id aliquam quia sit reprehenderit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...