UpREITs A common operating structure for publicly traded equity REITs is the umbrella partnership real estate investment trust (“UpREIT”1) structure. In a typical UpREIT structure, the REIT holds substantially all of its assets, and conducts substantially all of its operations, through a single operating partnership subsidiary (the “Operating Partnership”). In most cases, the REIT or a wholly owned subsidiary of the REIT serves as the sole general partner of the Operating Partnership, and, as a result, the REIT has the exclusive power and authority to manage the Operating Partnership’s business, subject to certain limited rights maintained by holders of units of limited partnership interest (“OP Units”) in the Operating Partnership pursuant to the partnership agreement. In addition to controlling the Operating Partnership, the REIT typically owns a majority of the outstanding OP Units. These OP Units were obtained by the REIT in exchange for the contribution by the REIT of the net cash proceeds from the REIT’s IPO or other equity capital raise. The remaining OP Units are ordinarily held by outside limited partners (“OP Unitholders”) who received their OP Units by contributing real estate assets that were previously owned by them (or their interests in the entities that previously owned such real estate assets) to the Operating Partnership in exchange for the OP Units. A comprehensive review of the pre-IPO organizational and capital structure is required to transfer the assets or interests in property owning entities in a tax-efficient manner and to identify all needed third-party consents. Determining the value of the contributed assets and the allocation of the OP Units being issued as consideration to the property contributors often involves significant analysis and negotiation and, in certain instances, may involve third-party valuation firms. Additionally, the scope of representations and warranties and indemnities in connection with such contributions and the granting of any governance or tax protection rights are subject to negotiation and valuation analysis by the underwriters. In the typical UpREIT structure, after an initial holding period, OP Unitholders may tender their OP Units for redemption by the Operating Partnership for cash or, at the option of the REIT, for shares of the REIT, typically on a 1:1 basis. The customary justification for such exchange ratio is that the OP Units and the REIT shares represent interests in essentially the same pool of assets and, therefore, should have the same pro rata interest in such assets. A typical UpREIT structure is depicted in the diagram below: COMMON STOCK OP UNITS OPERATING PARTNERSHIP OP UNITS 100% PROPERTY OWNING SUBSIDIARY PROPERTY OWNING SUBSIDIARY TAXABLE REIT SUBSIDIARY REIT (GENERAL PARTNER) LIMITED PARTNERS MANAGEMENT/ INSIDERS STOCKHOLDERS UpREITs and Roll-Ups 19 | 2024 Guide to REIT IPOs and Listing Transactions
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