Two ways that real estate investment groups can organize themselves.

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Matthew Retzloff
Matthew Retzloff
Matthew Retzloff
Investment Banking | Corporate Development

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to work for Raymond James Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars' M&A processes including evaluating inbound teasers/CIMs to identify possible acquisition targets, due diligence, constructing financial models, corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

Last Updated:February 10, 2024

What Is UpREIT Vs DownREIT?

UpREIT and DownREIT are two ways that real estate investment groups can organize themselves. These are both structures used in real estate investment.

UpREITs were created in 1992. They let existing real estate groups put all their properties into a new group without selling any. This new group doesn't own the properties directly. Instead, it's like an umbrella that covers them.

On the other hand, DownREITs lets people team up with a real estate group through a partnership.

Both ways offer tax-deferred benefits for investors, allowing them to defer capital gains taxes when exchanging properties for ownership interests in the REIT structure.

Dwight D. Eisenhower first developed Real Estate Investment Trusts (REITs) to provide an alternative to real estate mutual funds. REITs are thus a form of real estate portfolio comprising various real estate holdings and real estate financing resources.

Key Takeaways

  • UpREITs and DownREITs are alternative structures for real estate investment groups, offering distinct approaches to property ownership and investment partnerships.
  • UpREITs operate as umbrella partnerships, allowing real estate owners to exchange properties for REIT shares, providing investors with ownership interests in the REIT structure.
  • DownREITs facilitate partnerships between real estate owners and REITs, enabling property owners to retain ownership while deferring capital gains taxes on property sales.
  • DownREITs involve individual partnerships with investors, retaining property ownership and offering more control over assets, while UpREITs pool real estate assets under a centralized REIT structure, simplifying tax requirements and property management for investors.
  • Consider financial goals, tax preferences, and property management capacity when deciding between UpREITs and DownREITs, as each structure offers unique benefits and complexities suited to different investment strategies.

What is an UpREIT?

An UpREIT is a real estate investment trust that operates as an umbrella partnership. Real estate owners can exchange their properties for REIT shares through this collaboration. This is an example of a one-of-a-kind REIT structure.

This structure was created to stimulate real estate investment after the real estate recession of the 1990s. It was designed to meet the needs of investors to allow real estate owners to contribute to a property in exchange for a portion of ownership. 

As a result, if an investor does not want to sell the entire property, they can contribute it to an upREIT portfolio and receive units in exchange.

The value of the contributed property in exchange for REIT shares is typically determined based on various factors, including market value, potential income, and other considerations.


Additional provisions may be inside the REIT portfolio, such as allowing the seller to determine how their property should be vested in the REIT. Alternatives include requiring investors to retain their shares for a certain amount of time before receiving payment.

The fund handles all legal and administrative procedures once the property is contributed to the UpREIT. As a result, managing these portfolios can be fairly difficult if several properties are involved. A portfolio manager's primary objective is to deliver a good return for their investors.

The variation in the value of real estate holdings is one of the reasons this offers a high yield relative to other fixed-income securities. In addition, share prices will fluctuate due to broader market movements such as policy changes, financing deals, and other transactions.

Shareholders enjoy liquidity flexibility as they can convert their shares into cash without restrictions, allowing them to access their investments easily. This means that investors can change their shares into cash without restrictions.

    What is a DownREIT?

    A DownREIT is a partnership between a real estate owner and a real estate investment trust (REIT) to assist the real estate owner to acquire or control their current real estate. 

    This emerged as an alternate structure to suit investors' need to recognize the potential gain on their property. 

    The primary objective of a DownREIT is to assist real estate owners in deferring capital gains tax on valued property sales. Real estate owners who invest earn operating units in a partnership, similar to an UpREIT.

    When it comes time to sell the contributed assets, investors may negotiate for the REIT to agree to a standstill or lockout agreement, though this is not guaranteed in all cases.

    DownREITs benefit investors by offering tax-deferred benefits, rather than performance-based benefits, for contributed assets compared to the REIT portfolio's other assets.

    However, they are more complicated than UpREITs due to the speculation and risks involved. Therefore, they are typically employed when advantageous aspects are likely to materialize for the investor.


    Consider the following scenario: a portfolio of six properties with a total value of $100 million. The properties also have a 70 million-dollar debt with a 7% interest rate. The owners (partners) of these properties each have a total capital account balance of $5 million.

    The REIT will subsequently enter into a transaction to pay off $50 million of the property's current $70 million debt. The remaining partners will replace capital account balances with debt at 6% interest.

    For the remaining $20 million, operational units will be issued, the REIT will become the majority shareholder, and the investors will become general and limited partners.

    DownREIT vs. UpREIT

    Let's understand the difference in the table below:

    DownREIT vs. UpREIT
    Aspect DownREIT UpREIT
    Structure Partnership agreement with individual investors Real estate assets pooled under a new REIT structure
    Property Ownership Investors retain ownership of individual properties REIT directly owns all properties in the portfolio
    Control Investors have more control over their assets REIT has centralized control over all properties
    Tax Complexity More complex tax structure Simpler tax requirements for investors
    Capital Gains Tax Tax deferment may require more preparation Easier to defer capital gains taxes
    Property Management Potential for additional management responsibilities No property management responsibilities for investors

    How To Choose Between UPREITs And DownREITs

    Choosing between UPREITs and DownREITs depends on your financial goals, tax preferences, and ability to manage property. Here's how to decide:

    1. Financial standing: If you expect your property to appreciate more than the REIT portfolio, DownREITs might be better. Your assets are held at a partnership level, giving you more interest and control. Your investment relies on your property, not just the overall REIT performance.
    2. Tax preferences: UPREITs have simpler tax requirements, making it easier to defer capital gains taxes. DownREITs are more complex and may require more tax preparation. Depending on your comfort level with taxes, you might prefer one over the other. Working with tax professionals is wise to ensure you meet IRS requirements.
    3. Ability to own or manage property: DownREITs have property ownership rights, which could mean more management responsibilities. UPREITs, on the other hand, don't involve property management. Consider your capacity and willingness to handle property management tasks when deciding.

    Researched and authored by Freida Lee | LinkedIn 

    Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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